UNDERSTANDING THE "TAX FREE" EXCHANGE

Residential homeowners have a number of tax benefits, the most important of which is the exclusion of up to $500,000 profit made on the sale of the principal residence.

But real estate investors -- large and small -- still have to pay capital gains tax when they sell their investments. And since most investors depreciated their properties over a number of years, they often have to "recapture" the depreciation, as well as paying a lot of capital gains tax.

There is a way of deferring payment of this tax, and it is known as a Like-Kind Exchange under Section 1031 of the Internal Revenue Code.

Keep in mind the exchange process is not a "tax free" device, although people refer to it as a "tax-free exchange." It is also called a "Starker exchange" or a "deferred exchange." It will not relieve you from the ultimate obligation to pay the capital gains tax. It will, however, allow you to defer paying that tax until you sell your last investment property..

The rules are complex, but here is a general overview of the process.

Section 1031 permits a delay (non-recognition) of gain only if the following conditions are met:

First, the property transferred (called "relinquished property") and the exchange property ("replacement property") must be "property held for productive use in trade, in business or for

investment." Neither property in this exchange can be your principal residence, unless you have abandoned it as your personal house.

Second, there must be an exchange; the IRS wants to ensure that a transaction that is called an exchange is not really a sale and a subsequent purchase.

Third, the replacement property must be of "like kind." The courts have given a very broad definition to this concept. As a general rule, all real estate is considered "like kind" with all other real estate. Thus, a condominium unit can be swapped for an office building, a single family home for raw land, or a farm for commercial or industrial property.

Once you meet these tests, it is important to determine the tax consequences. If you do a like-kind exchange, your profit will be deferred until you sell the replacement property. However, the cost basis of the new property in most cases will be the basis of the old property. Discuss this with your accountant to determine whether the savings by using the like-kind exchange will make up for the lower cost basis on your new property. Also, if you do not do an exchange, how much tax will you have to pay. Sometimes, its better to "bite the bullet" and pay the tax, rather than get involved with another rental, investment property.

The traditional, classic exchange (A and B swap properties) rarely works. Not everyone is able to find replacement property before they sell their own property. In a case involving a man named Mr. Starker, the court held that the exchange does not have to be simultaneous.

Congress did not like this open-ended interpretation, and in 1984, two major limitations were imposed on the Starker (non-simultaneous) exchange.

First, the replacement property must be identified before the 45th day after the day on which the original (relinquished) property is transferred.

Second, the replacement property must be purchased no later than 180 days after the taxpayer transfers his original property, or the due date (with any extension) of the taxpayer's return of the tax imposed for the year in which the transfer is made. These are very important time limitations, which should be noted on your calendar when you first enter into a 1031 exchange.They are literally carved in stone; they cannot be waived or modified.

In 1989, Congress added two additional technical restrictions. First, property located in the United States cannot be exchanged for property outside the United States.

Second, if property received in a like-kind exchange between related persons is disposed of within two years after the date of the last transfer, the original exchange will not qualify for non-recognition of gain. You must obtain legal advice on this very complex area of "related persons".

In May of 1991, the Internal Revenue Service adopted final regulations which clarified many of the issues. Here are some of the major highlights:

1. Identification of the replacement property within 45 days. According to the IRS, the taxpayer may identify more than one property as replacement property. However, the maximum number of replacement properties that the taxpayer may identify is either three properties of any fair market value, or any number of properties as long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all of the relinquished properties.
2. Who is the neutral party? Conceptually, the relinquished property is sold, and the sales proceeds are held in escrow by a neutral party, until the replacement property is obtained. Generally, an intermediary or escrow agent is involved in the transaction. In order to make absolutely sure the taxpayer does not have control or access to these funds during this interim period, the IRS requires that this agent cannot be the taxpayer or a related party. The holder of the escrow account can be an attorney or a broker engaged primarily to facilitate the exchange.
3. Interest on the exchange proceeds. One of the underlying concepts of a successful 1031 exchange is the absolute requirement that not one penny of the sales proceeds be available to the seller of the relinquished property under any circumstances unless the transactions do not take place.

Generally, the sales proceeds are placed in escrow with a neutral third party. Since these proceeds may not be used for the purchase of the replacement property for up to 180 days, the amount of interest earned can be significant. Or it used to be before banks started paying less then pennies on the dollar in interest accounts.

The IRS permits the taxpayer to earn interest -- referred to as "growth factor" -- on these escrowed funds. Any such interest to the taxpayer has to be reported as earned income. Once the replacement property is obtained by the exchanger, the interest can either be used for the purchase of that property, or paid directly to the exchanger.

The rules are quite complex, and you must seek both legal and tax accounting advice before you enter into any like-kind exchange tra

Source: RealtyTimes, Benny L. Kass
http://realtytimes.com/consumeradvice/sellersadvice1/item/46509-20160804-understanding-the-tax-free-exchange

Santa Clara approves Silicon Valley's biggest private development deal ever

SANTA CLARA -- Feeling giddy in the aftermath of the City Council's unanimous approval of a $6.5 billion development deal, Mayor Lisa Gillmor on Thursday called the experience "surreal."

"It's exhausting. It's a little bit nerve-wracking. There's so much information that we've had to digest, comprehend and weed through," Gillmor said, predicting, "This is going to be the key to our financial future in Santa Clara."

The 9.7 million-square-foot City Place -- described as the largest private development project in Silicon Valley's history -- is to be built by the Related Companies on 240 acres of city-owned land across from Levi Stadium. Plans call for up to 5.7 million square feet of offices, 1.1 million square feet of retail space, 700 hotel rooms and from 200 to 1,680 apartments, as well as a 35-acre park.

Sitting atop what is now a golf course and BMX track, the mixed-use project's anticipated tax and other financial benefits are "staggering," Gillmor said.

The city has projected that it will receive up to $16.9 million in annual tax benefits, along with $9 million to $14 million in yearly rent revenues, once the project is up and running.

The county should benefit, too: Its annual property and sales tax benefits are pegged at up to $11.6 million, while the Santa Clara Unified School District anticipates receiving as much as $22.1 million each year in property taxes. The Valley Transportation Authority would receive up to $8 million annually in sales taxes, according to City Place projections.

Santa Clara's share would be a huge shot in the arm to the city's general fund, which has taken a $14 million annual hit since the dissolution in 2012 of the state's redevelopment agencies, Gillmor said. It will "make up the cash flow into our general fund for generations to come."

Construction costs are tagged at $5 billion, with more than 80 percent of the work to be handled by union labor. Built on landfill, the project involves the construction of a massive platform on top of which its core elements -- dubbed the City Center -- will sit: retail and department stores, hotel rooms, residential units and about 1 million square feet of offices.

"We call it our uptown," said Gillmor.

Historically, the city has lacked its own entertainment district: "Residents have to go to other cities, like Campbell, Los Gatos and (San Jose's) Santana Row," said acting City Manager Rajeev Batra. "But this will provide all those restaurants and destinations in Santa Clara, and also keep our tax revenues here."

Councilwoman Kathy Watanabe put it like this: "It creates a new destination for out-of-towners coming to Silicon Valley. Sometimes it just takes awhile for things to happen, and now it's happening."

Tuesday's approval of the project was "definitely a relief," Batra said. "It's a big milestone, obviously, and you wouldn't believe how much hard work has gone into it from all of the staff. The documentation itself -- if you saw the package, there were 3,000 pages behind the 20-page report to the council."

The idea for the project was informally floated about four years ago, Gillmor said. Founded by Miami Dolphins owner Stephen Ross, Related began talking to the city about three years ago.

Construction on the first of the project's eight phases should begin in summer 2017 "if everything lines up," Batra said.

Likewise, the City Center should be completed in five to seven years, "if not a bit sooner," said Stephen Eimer, an executive vice president with Related and comanaging partner of the project.

The construction of outlying office parks -- up to another 5 million square feet or so, he said -- will be subject to market demand and likely come online later.

One detail of note: 49ers legend Joe Montana, a limited partner in the project, expects to establish a restaurant in the City Center: "He's going to do a Montana-themed, football-themed restaurant," Gillmor said. "He will have a signature development on this property."

City Place has not been without its critics. Neighbors have voiced concerns about traffic, parking and other quality-of-life issues. San Jose officials wondered about the project's environmental impact and complained that the city will have to provide housing and services for those who work at nearby City Place.

Gillmor on Thursday dismissed San Jose's objections: "This is going to be a huge benefit to the entire area," she said. "We want our workers to work here, play here and live here, and this is the kind of development that will do that for Santa Clara, Sunnyvale and especially North San Jose."

Source: San Jose Mercury News, Richard Scheinin
http://www.mercurynews.com/business/ci_30077172/its-surreal-silicon-valleys-biggest-private-development-project

5 Tax Benefits of Owning a Second Home

There are tons of benefits that come with owning a second home: novelty and adventure, a place to escape and unwind, an opportunity to create memories that last a lifetime, a valuable tool to make vacation-craving friends like you a whole lot (for better or for worse).

But there’s another benefit that’s often overlooked: the tax breaks.

You already know that owning a home usually offers some tax deductions. But what if you own two? Or three? What if you’re a regular Donald Trump (back in his real estate, meat magnate heyday, of course)?

Since we know you won’t mind a little extra cash to spend while soaking in your surroundings during your next getaway, we thought we’d tell you how to reap the fruits of your second-home purchase.

1. Mortgage interest—yes, again

When it comes to owning a second home, the interest on your mortgage is deductible. The same rules that come with writing off mortgage interest for your first home apply to your second.

In fact, you can write off as much as 100% of the interest you pay on up to $1 million of debt, which includes total debt taken on to pay for both homes, as well as money spent on improving the properties. (That’s not up to $1 million for each property—just up to $1 million in total.)

2. Home improvements

Is your second home a fixer-upper? If you want to spend the off-season making improvements to your hideaway, you can deduct the interest on a home equity loan or line of credit.

But there are a couple of exceptions.

For starters, there will be a limit on the amount you can deduct if the home equity loan on your main or second home is more than $50,000 if filing single or $100,000 if married or filing jointly.

Second, the amount you can deduct has a limit if the mortgage is more than the fair market value of the home, says Gil Charney, director of The Tax Institute at H&R Block.

For example, let’s say a taxpayer has a mortgage of $220,000 and takes out a home equity loan of $65,000. The property’s fair market value is $275,000. Since the difference between the fair market value and the mortgage is $55,000, then $55,000 of the home equity loan can be deducted, not the full $65,000.

3. Property taxes

You can also deduct your second home’s property taxes, which are based on the assessed value of the home. That’s good news. Even better news? Unlike the mortgage interest tax deduction, there’s no dollar limit on the amount of real estate taxes that can be deducted on any number of homes owned by the taxpayer.

But beware: Taxpayers who can afford two homes are likely to land in a higher tax bracket—which means slimmer pickings for tax savings. For example, in 2016, a married couple whose gross income exceeds $311,300 would have limits on the types of itemized deductions they could take.

4. Renting out your home

If you rent out your second home for 14 days or less over the course of a year, that rental income is tax-free—and there’s no limit to what you can charge per day or week. Score!

But if you’re hoping to put your secondary digs on Airbnb or another rental site for more than 14 days during the year, be prepared to do some heavy math come tax time.

You’ll want to figure out the number of days you rent your home and divide that by the total number of days your home was used—whether it was you or a renter staying there. (The total number of days that the home was vacant doesn’t fall into this equation.)

For instance, let’s say you rented out your vacation home for 30 days within a year, and vacationed in your home for 90 days.

We’ll divide 30 (the days you rented it out) by 120 (the total number of days the home was used). The result: 25% of your rental-related expenses—which could range from utilities to the cost of a property manager—can be deducted. Now, if your home is losing value, that same percentage (in this example, 25%) of depreciation costs can also be deducted.

Here’s the caveat, Charney explains: Depreciation costs can be deducted only if there is rental income remaining after taking into account other deductions, such as mortgage interest, property taxes, and direct expenses tied to renting your home—like agent fees or advertising.

5. When it’s time to sell

Maybe you bought a far-off hideaway that you’re lucky to visit a couple of times a year. Or perhaps your vacation home is just a quick drive away, and you spend every possible moment there.

If it’s the latter—and you don’t already know which of your homes is your primary residence and which is the second home—now’s the time to figure it out. Distinguishing between the two can have big tax implications when it comes time to sell.

That’s because a capital gain of up to $250,000 (or $500,000 for taxpayers who are married/joint filers) on the sale of the principal residence may be excluded from taxable income.

Your principal—or primary—residence is the home you used most during the five years prior to the sale. But other factors—such as your job’s location, voter registration address, and banking location—could also come into play. Among other requirements, you must own and use that principal residence for at least two of the five years before the home is sold.

We know—that’s a lot of heavy stuff to take in. But you knew your second home would pay off in more ways than one, right? Now, hurry up and file your tax return—so you can escape to your happy place and forget about burdensome things. Like taxes.

Source: Realtor.com, Renee Morad
http://www.realtor.com/advice/finance/second-home-tax-benefits/?iid=rdc_news_hp_carousel_theLatest

Tax Tips for Rental Property Owners

It’s tax season again. If you own a rental property, your tax strategy is more complex than for the home you live in. Here are some important tax tips for rental property owners.

Rental property tax considerations each year

Here are some points to keep in mind when you file your annual return:

• Your rental property shows up on Schedule E of your tax returns, which logs rental income and expenses. The expenses include mortgage interest, property tax, maintenance, repairs, utilities, property management fees, depreciation, and all other costs associated with owning the property.
• If you pay points when you close your rental property purchase loan, you cannot fully deduct them the year they were paid like on a primary residence purchase. Instead, you must deduct points over the life of your loan.
• If your rental income exceeds expenses each year, the income is taxable just like any other income.
• If expenses exceed rental income on Schedule E — which is common because of the depreciation expense line item — you can deduct rental losses if your non-property income is up to $150,000 per year. If your non-property income is up to $100,000, you may be able to deduct rental property losses up to $25,000 annually. If you earn between $100,000 and $150,000, this potential deduction benefit is cut in half. And if you earn above $150,000, you cannot deduct rental property losses.
• If you earn too much to deduct rental property losses, the losses can accrue as an offset to capital gains taxes when you sell.
• Ask your tax adviser whether deductions or accrual of rental losses fits your tax profile.

Rental property tax considerations when you sell

When you sell a rental property, you will pay capital gains taxes on your appreciation. You must consult a tax adviser to get accurate figures, but here’s a simplified formula for estimating capital gains taxes and net profit on a sale.

Subtract purchase price, cost of improvements you made, and total selling cost (including realtor, title, and local tax fees) from sales price. The resulting number is your capital gain, and you’ll pay federal and state taxes of about 25 to 30 percent (based on your tax profile) on the capital gains.

Let’s see what this formula looks like if you bought a home eight years ago for $200,000 using 20 percent down and a 30-year fixed rate of 6 percent (the rate at the time). A quick mortgage calculator analysis tells us that your balance is now $140,435.

Suppose you made $10,000 in improvements to the home along the way, you earn less than $100,000 per year (so you didn’t accrue any rental losses to offset capital gains), and you’re now selling the property for $300,000. In a county that has a total of 7-percent selling cost (including real estate agent commission, transfer taxes, title, and settlement fees), your estimated capital gains would be about $69,000.

Using the capital gains tax formula above, you’d have about $17,250 to $20,700 in taxes due, and you’d therefore net about $117,865 to $121,315 on the sale.

How to avoid capital gains taxes on rental property

You can avoid this tax hit if your intent is to buy a new rental home immediately after you sell.

You do so with an IRS benefit called a 1031 Exchange, which is named after the IRS code number. This allows you to defer paying the capital gains taxes at closing as long as you identify a new rental property to buy (in writing) within 45 days, and close the new purchase within 180 days of closing your sale.

To get the full tax benefit, the new purchase must be of the same or greater than your sales price, and you must put every penny of net proceeds from the sale into the new purchase.

A 1031 Exchange defers rather than eliminates the tax hit in your sale.

If you plan to convert the new rental property to a primary residence at some point in the future after the exchange, the IRS has no specific rules prohibiting you from doing so. If this is your strategy long term, consult your tax adviser on capital gains tax implications before you enter into your exchange.

Source: Zillow Blog, Julian Hebron
http://www.zillow.com/blog/tax-tips-rental-property-owners-194050/

Move Over, Homeowners—Renters Could Get Tax Breaks, Too

Like any other Realtor whose worth their salt, I always tell my buyers that the biggest incentives for buying a home are the tax breaks. It can be argued that not as many homes would have been sold over the years if there were no tax incentives. The IRS does it to encourage home ownership, because it is believed that home owners build better communities.

Now, Representative Alan Grayson of Florida has introduced a bill in which renters will get a tax break for renting. One school of thought is that this will encourage renters to stay renters, and not ever want to buy a home. Another school of thought out there is that this might encourage more home ownership because renters could use the money they get from the tax incentive to put towards a future down payment on a house. 

Who is right? Only time will tell if the bill passes, which it is likely to not pass since it is being introduced by a Democrat congressman in a Republican controlled congress. If the bill doesn't pass, it is likely to be introduced again sometime in the future. 



It’s been said many times: The rent is too damn high. And now a recently introduced bill is trying to cut renters a break—a tax break, that is.

The bill, if it became law, would allow renters to deduct from their federal taxes what they pay for the primary roof over their heads—a proposal that could save them thousands per year.

“There’s an unequal treatment now of owners and renters,” says Rep. Alan Grayson, a Democrat from Florida, who introduced the bill. He hopes this bill would level the playing field .

For example, the average taxpayer shelling out about $1,500 a month (or $18,000 a year) could potentially save $4,500 annually through the deduction if he or she is in the 25% tax bracket, he says.

“Renters should be able to share in the tax savings,” he says. “This is a tax benefit that would go primarily to people who need it.”

About 37% of U.S. households were renters in 2015, according to a recent report from the Joint Center for Housing Studies of Harvard University.

And 49%, or 21.3 million, of renters were considered cost-burdened (that is, they plunked down more than 30% of their paychecks on housing) in 2014. Meanwhile 26%, or 11.4 million, were severely cost-burdened, shelling out more than half of their earnings each month.

“It could be a great boon for renters,” says Mindy Ault, a research associate at the National Housing Conference, a group that supports affordable housing. She notes that rents are steadily rising, but wages aren’t necessarily keeping pace.

Homeowners can currently deduct the interest they pay on their mortgages (up to $1 million) and their property taxes from their taxes. That can add up to $2,500 in savings for those in the 25% tax bracket deducting $10,000 of interest.

Those tax breaks are strong incentives for folks to buy their homes. But if the rental bill was passed, more people, particularly younger individuals and couples, might choose to continue renting instead, says Ault.

“One of the big arguments for homeownership as a means for a family to build wealth are the tax credits,” Ault says.

Many states already have their own tax credit programs for renters, mostly aimed at low-income or elderly residents. But the programs vary widely and aren’t available in each state.

They don’t “reduce your tax obligation the way a mortgage would,” says Fred Tayco, director of government affairs at the National Apartment Association, a trade organization that represents property owners, developers, and builders. And while the programs “may help, [they’re] not as significant as people would think it would be.”

For example, Indiana renters can deduct up to $3,000 from their state taxes if they meet certain requirements. Meanwhile, low-income disabled or elderly Connecticut renters can receive up to $700 if they’re single and up to $900 if they’re married.

But the likelihood of the bill being signed into law is slim, says Linda Couch, senior vice president for policy at the National Low Income Housing Coalition. Proposed laws tend not to get passed the first time they are introduced and this one was proposed by a Democrat in a Republican-controlled Congress, she says.

However, if it did pass, the tax break might actually boost homeownership.

“It could help renters who are looking to become homeowners, because it will lower their housing costs,” Couch says. “That savings could be put toward a down payment.”

Source: Realtor.com, Clare Trapasso
http://www.realtor.com/news/real-estate-news/tax-breaks-for-renters/



Related:
Home sweet homeowner tax breaks
Freshen Up On The 7 Financial Benefits Of Home Ownership This Tax Season

Hey, Homeowners! These Little-Known Tax Deductions Can Save You Thousands

Sawayasu Tsuji/Getty Images

You probably already know that owning a home comes with some sweet tax benefits, like the mortgage-interest and property-tax deductions. But did you know there’s a whole list of other homeowner-related tax breaks that you might be leaving on the table?

We’re not talking chump change, either. Homeowners already save an average of $3,000 a year in taxes from mortgage-interest and property-tax deductions, according to the National Association of Realtors. When you add in some of the lesser-known homeowner tax breaks, you could really be amping up the savings—and beating the IRS at its own game.

Back in December, Congress passed the Protecting Americans From Tax Hikes Act of 2015, which extended many exemptions that were about to expire and made others permanent. But to reap the benefits, you first have to know about them.

So, here we go! Check out these common—and not-so-common—homeowner deductions that you should take advantage of this year:

1. Mortgage interest deduction

If you’ve taken out a loan to buy a house, you can deduct the interest you pay on a mortgage, with a balance of up to $1 million. To access this deduction, you will have to itemize rather than take the standard deduction. The savings here can add up in a big way. For example, if you’re in the 25% tax bracket and deduct $10,000 of mortgage interest, you can save $2,500.

Of course, there are some limitations. For example, if you’re helping a family member pay his or her mortgage, you can’t deduct that interest on your tax return.

2. Private mortgage insurance

Qualified homeowners can deduct payments for private mortgage insurance, or PMI, for a primary home. Sometimes you can take the deduction for a second property as well, as long as it isn’t a rental unit. Here’s the catch: This only applies if you got your loan in 2007 or later.

Another restriction: This deduction only applies if your adjusted gross income is no more than $109,000 if married filing jointly or $54,500 if married filing separately.

3. Property taxes

You can include state and local property taxes as itemized deductions. An interesting note: The amount of the deduction depends on when you pay the tax, not when the tax is due. As a result, paying property taxes earlier could have a positive impact on your return.

4. Capital gains on a home sale

The dreaded capital gains tax can be avoided when the gain from selling your personal residence is less than $250,000 if you are a single taxpayer or $500,000 if you are a joint filer. To qualify, you must have owned and used the home as a primary residence for at least two years out of the five years leading up to the sale.

5. Medical improvements

If you’ve made improvements to your home to help meet medical needs, such as installing a ramp or a lift, you could deduct the expenses—but only the amount by which the cost of the improvements exceed the increase in your home’s value. (In other words, you can’t deduct the entire cost of the equipment or improvements.)

“A lot of this comes down to fact and circumstance,” says Gil Charney, director of The Tax Institute at H&R Block. “For example, if you’ve recently installed a heated therapy spa or hot tub in your home, you may be able to deduct the expense if there’s also evidence that, say, a physical therapist visits your home three times a week and you’re over a certain age.”

6. Home office

If you have a dedicated space in your home for work and it’s not used for anything else, you could deduct it as a home office expense.

“It doesn’t have to be an entire room,” Charney says. “It can just be a dedicated space.”

7. Renting out your home on occasion

If you rented out your home for, say, a major sports event like the Super Bowl or the World Series, or a cultural event such as Mardi Gras, the income on the rental could be totally tax free—as long as it was for only 14 days or fewer throughout the course of a year.

8. Discount points

Discount points, which are paid to lower the interest rate on a loan, can be deducted in full for the year in which they were paid. In addition, if you’re buying a home and the seller pays the points as an incentive to get you to buy the house, you can deduct those points, Charney explains.

9. Energy-efficiency tax credit

You can take advantage of an energy-efficiency tax credit of 10% of the amount paid (up to $500) for any green improvements, such as storm doors, energy-efficient windows, and air-conditioning and heating systems.

10. Loan forgiveness deduction

If you’re the owner of a foreclosed or short-sale home, you can take advantage of mortgage-debt forgiveness. For example, if you make a short sale of your primary home at $250,000 but owe $300,000 on your mortgage, the lender will forgive the extra $50,000 owed—and you don’t have to pay taxes on that amount.

For more tax tips, check out IRS Publication 530 for a list of what homeowners can (and cannot) deduct.

Source: Realtor.com, Renee Morad
http://www.realtor.com/advice/finance/these-little-known-tax-deductions-can-save-you-thousands/?iid=rdc_news_hp_carousel_theLatest

Plan Now to Cash In on Homeowner Tax Benefits Next Year

Plan Now to Cash In on Homeowner Tax Benefits Next Year
Did you miss the chance to maximize your deductions this year? Find out what you need to know to save money next time.


In the rush to file taxes each year, many homeowners are more focused on meeting the deadline than understanding their deductions — especially if it’s their first year as a homeowner.

Now that this year’s tax deadline has passed and you have some time to think, here are some tips on fine-tuning your strategy for next year.

Defining homeowner tax deductions

A tax deduction reduces your taxable income so you pay tax on less income. If you own your primary residence, the IRS allows you to deduct mortgage interest and property taxes you paid throughout the year for which you’re filing.

This deduction happens on Schedule A of your IRS tax returns. You then carry this deduction over to the front of your tax return, which is called Form 1040, and subtract the deduction from your gross income to arrive at a new, lower income, which you’re actually taxed on.

Simply put: Being taxed on income that’s been reduced by deductions means you pay less taxes.

Exactly what can I deduct as a homeowner?

Your property taxes are deducted from your income using line 6 of Schedule A, and this can include all property taxes paid during the filing year.

If your mortgage payments include your real estate taxes, you can deduct only the amount your lender actually paid to your county assessor that year (rather than the amount your lender collected from you to pay taxes).

If you bought the home in the year for which you’re filing, your line 6 deduction can also include any pro-rated property taxes you paid on your final closing statement, so keep that statement in your tax files.

Your mortgage interest is deducted from your income using lines 10 and 11 of Schedule A. Line 10 is to deduct mortgage interest paid to your lender, who will send you a 1098 form showing how much mortgage interest you paid them during the tax year. Think of a 1098 like a W2, but instead of showing how much you made, it shows how much mortgage interest you paid. If you refinanced from one lender to another during the year, you’ll get 1098 forms from each of them, and can deduct interest paid on both.

If you bought the home in the year for which you’re filing, your line 10 deduction can also include any pro-rated mortgage interest, “discount” fees, or “origination” fees you paid on your final closing statement, so keep that statement in your tax files, too.

Line 11 is to deduct mortgage interest paid to a private lender that didn’t issue a 1098. In these cases, the IRS requires you to write that recipient’s identifying number and address on the dotted lines next to line 11. If the recipient is an individual, the identifying number is their social security number. If it’s an entity, it’s their employer identification number.

What does my tax benefit look like after deductions?

Suppose you were a single home buyer earning $90,000 per year and buying a $300,000 home with 20 percent down using a 30-year fixed rate of 3.75 percent.

This would give you a total housing payment of $1,478, which is comprised of $1,111 mortgage payment, $300 property taxes, and $67 insurance. A full year of mortgage interest would be about $9,000, and a full year of property tax would be about $3,600. These two deductions reduce your taxable income by about $12,600.

To quickly calculate your estimated tax savings, you can multiply $12,600 by your estimated tax rate of about 28 percent. The result is $3,528, meaning you’ll pay about this much less in taxes because of your homeowner deductions.

If you convert this to a monthly figure of $294 and subtract it from your total housing payment of $1,478, it reduces your after-tax housing cost to $1,184.

These are only illustrative estimates. You should consult a tax professional for precise figures specific to your situation.

Will mortgage interest deductions be eliminated soon?

Every year, politicians debate the relevance of homeowner tax deductions, and the most recent is a bill introduced in March 2015 to reduce the benefits of the mortgage interest deduction.

There is no timeline for the fate of this bill, and unless the tax code changes, it’s best to focus on current rules for mortgage interest deductions.



Source: Zillow Blog, Zillow Team
http://www.zillow.com/blog/homeowner-tax-benefits-next-year-174789/

10 homeowner tax breaks you should be taking advantage of

Great tax advice for you homeowners out there or those of you that are thinking of becoming one. I always tell my clients that owning a home has numerous tax advantages, but I can't say too much because my real estate license doesn't allow me to give tax advice. Anyhow, here is a great article from MarketWatch that I hope you will enjoy.



If death and taxes are the two true givens in life, there probably should be a third: the bucketful of tax breaks Uncle Sam throws out every year to encourage more Americans to buy a home.

From being able to write off virtually all mortgage interest, not only for your primary home, but for a second home as well — up to $1.1 million of debt (when you include home-equity loans) in most cases, to being able to write off your property taxes, homeowners have opportunities for dozens more federal income tax deductions than renters.

In fact, only 21 states and the District of Columbia offer renters any kind of tax breaks or credits — generally credits for property taxes.

Americans took $68.5 billion in mortgage interest deductions (MID) alone in 2012, according to the Congressional Research Service (CRS), saving Americans who owned homes about $1,900 a year, on average. This is particularly beneficial to first-time home buyers whose early monthly payments in a 30-year loan are mostly only interest. About half of American homeowners took advantage of the MID in 2012, the CRS said. What about the other half? Well, according to the CRS, they already paid off their homes or the mortgage interest deduction was less than the standard tax deduction.

“If you have taken out a homeowner’s loan, consider these deductions as Uncle Sam’s gift to you. These tax breaks will surely alleviate the financial burden of many taxpayers, especially those who are paying their mortgage,” says John Gregory, founder of 1040Return.com, a Baltimore-based tax-prep company.

Some of the most significant tax breaks that only homeowners can claim are fairly well-known, such as the MID, but here are some others:

1. Points on home mortgage and refinancing: If you bought a home in 2014 with a mortgage, then in addition to the mortgage interest (which may not be a lot if you bought late in the calendar year), you can probably write off the points (both origination and discount points) on your tax return, says Jackie Perlman, principal tax research analyst at H&R Block (HRB). One point is equal to 1% of the principal loan amount. That’s because the IRS considers points to be prepaid interest. The challenge is whether you’re eligible to deduct the points all at once, or whether you have to spread the costs out over the life of the loan. Generally, if you bought your first home or got a loan on that first home, you can take the deduction all at once, the IRS says. For a second home, and often for a refinance on a first home, the IRS says you most likely have to spread it out. “You have to meet all the criteria in order to deduct them up front, otherwise you have to amortize them over the life of the loan,” she said. A good place to start, she says, is the IRS Tax Information for Homeowners guide.

2. Interest on home-improvement loan: The IRS considers the interest on a home-improvement loan fully deductible, up to $100,000 in debt. In addition, interest paid on a home equity line of credit (HELOC) is also tax-deductible. However, as Greg McBride, chief financial analyst with Bankrate.com, notes, any portion of a home loan that is over 100% loan-to-value (meaning the loan is worth more than the value of the property) isn’t deductible.

3. Property tax: Property taxes are almost always tax-deductible, but some things on your settlement document that might look like taxes really aren’t, says McBride. You can’t write off your attorney and appraisal fees, title insurance and credit report costs either, McBride notes. Transfer taxes however can be written off, says Gregory.

4. Energy-efficiency tax credit: If you made efforts in 2014 to make your home more energy efficient by installing equipment like storm doors, energy efficient windows, insulation, air-conditioning and heating systems, the IRS wants to give you a tax credit of $500, though only $200 of that can be used for the windows. The credit however is set to expire on Dec. 31, 2016.

5. Renewable-energy tax credit: If you’ve installed equipment that uses renewable sources of energy, such as the sun and wind, to help power your home, you may be eligible for the Renewable Energy Efficiency Property Credit. You are eligible for this tax credit up to a whopping 30% of the cost of the equipment, installation included, so long as the equipment is placed in service by the end of December 2016. About 600,000 American homeowners have added residential solar equipment since 2010, according to the Solar Energy Industries Association.

6. Ground rent: There are rare situations in the U.S. for homeowners where the original owner still owns the land under your house after you’ve bought it, and you own the aboveground property and “rent” the ground from the owner. The “ground rent” option reduces the cost of the home since you’re not buying the land. The IRS lets you get a break for this situation and thus “ground rent” amounts can be deducted if you have been paying the rent monthly or annually, so long as the lease is for more than 15 years. However, if you’re making a payment to capitalize the ground rent, to buy out the lessor’s interest to get out from under it every year, that payment isn’t deductible, the IRS says.

7. Income and interest on reverse mortgages: The IRS considers reverse mortgages as a loan advance not income, so the amount you receive isn't taxable. But the interest accrued on a reverse mortgage isn't deductible until the loan is paid off, so you can’t take a deduction each year for the interest as you might with the traditional mortgage interest you pay, says Gregory.

8. Private mortgage insurance: You may be eligible to claim the deduction for private mortgage insurance (PMI) or mortgage insurance premiums on your tax return, though the 2014 tax year is the last year the deduction can be taken. Keep in mind that the deduction for qualified mortgage insurance premiums is reduced if your adjusted gross income (AGI) is over $100,000, and if it’s over $109,000 you can’t take the deduction at all. And you won’t get around that limitation if you’re married and filing separately, as the deduction begins to be reduced at $50,000 in AGI and disappears at $54,500.

9. Home expenses and improvement: If you make improvements to your property, you cannot write off the cost of home improvement, such as the materials and the labor. (Though you can write off the interest of course if you took out a home loan to pay Joe Contractor and purchase the materials.) However, when you sell your home, you can add the cost into the asking price of your property, which should diminish the capital gain when you sell your home, says Gregory of 1040Return.com.

10. Buying a home: The IRS allows first-time home buyers to withdraw up to $10,000 from their traditional IRA (and even Roth IRAs) penalty-free to help with the purchase of the home. Your spouse or even a parent, child, or grandchild can kick in another $10,000 from their IRA accounts, for a total of up to $20,000. You can also borrow half of your 401(k) balance up to $50,000 for the purchase of a home. But, the interest you pay on that 401(k) loan, unlike a mortgage loan, isn’t tax-deductible, notes Perlman.



Source: MarketWatch, Daniel Goldstein
http://www.marketwatch.com/story/10-homeowner-tax-breaks-you-should-be-taking-advantage-of-2015-04-02?adbid=10153787261873484&adbpl=fb&adbpr=77713743483&cid=soc_20150402_43166766&utm_content=buffera6495&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer

Legal Tax Deductions For Rental Properties

Legal Tax Deductions For Rental Properties

Are you a rental property owner? If so, it’s great isn’t it?  You receive income from the rents, also known as other people’s money (OPM), and you realize capital appreciation from the equity gains in the value of the property – a rising tide raises all boats.  In fact using OPM is a great strategy for paying for your child’s college education, and providing a passive income stream for yourself in your retirement.  The key is buying and holding onto an investment property as soon as possible and taking full advantage of the IRC allowable deductions and expenses.  Becoming educated about this investment strategy is easy, fun, and should be taught to your children.

Deductions Are Your Friends In The Rental Property Business

I’m sure you also know that many of the expenses that you incur that are rationally related to your rental property are tax deductions against any income that you earn.  But did you know that you may qualify for a greater tax advantage than 95% of passive real estate investors?  If you spend more than one-half of your time working your rental property business, including development, construction, acquisition, or management, and spend 750 hours a year in the real estate operations you can qualify for the Internal Revenue Service “Real Estate Professional” status.  This is a big tax bonus that many people don’t realize exists.  If you have “Real Estate Professional” status your losses, including depreciation against your rental properties, can be deducted against your ordinary income, not just your rental income.  If you have multiple rental properties this can be a huge tax savings as rental properties are allowed to be depreciated over a 27-1/2 year period.  There are many people who are leaving a lot of money on the table each year because they are not familiar with this “Real Estate Professional” status.

Improvements Are Not Repairs

There is a world of difference between the term “improvement” and the term “repair.”  The IRS takes great exception to people who attempt to expense a kitchen remodel or a new roof on their rental property.  Both of these projects would be considered an “improvement” and would have to be deducted over the lifespan of the component.

Repairs on the other hand are small projects that keep the rental property operating smoothly – like a leaky kitchen faucet that gets replaced, or a broken toilet flange, or a failed smoke alarm.  These repairs are expenses which can be deducted in the tax year for which they were made.

Travel expenses can be expensible deductions as well if you are making a trip to maintain the property, or have a discussion with the tenant, or to collect a rent check.  However, if the transportation expense was borne due to some planned improvement like a bathroom remodel then the travel expense would not be expensible and would be allowed to be depreciated with the improvement.

Common Expenses That You Shouldn’t Forget

There are numerous legitimate expenses for rental property owners.  They include mortgage interest, insurance expense, property taxes, gardening maintenance, legal fees, property management fees, leasing expenses, advertising expenses, damages to the property, office supplies to run your property business (if applicable), and bank fees to name the common ones.

Professional Property Managers Keep Records And You Should To

If you hire a competent professional property manager to run your rental property business they will keep good records for you as they are required to by the law.  Professional property managers will provide you with timely monthly statements which include income, expenses, invoices, and notes.  Also, you should receive a detailed Profit and Loss statement in early January of the following year.  If you don’t receive detailed statements like this you should seek to hire another property manager.

If you manage the property by yourself you should be keeping these records (and copies or scanned files) of every document that is created related to the rental property business. This is crucial for two reasons: 1) tax audit preparation, and 2) litigation preparation.

Professional Property Management By Real Estate Attorney

If you are fortunate enough to find a professional property management group that has a real estate attorney on staff that would be a great value.  The legal expertise alone provides a value added service which 99% of property managers can’t match.   Silicon Valley Property Management Group (SVPMG) is a full service property management company that manages, develops, and sells real property on the Peninsula and specifically Palo Alto.  SVPMG has a full-time real estate attorney on staff and can provide risk mitigation along with typical property management services.

Source: Silicon Valley Property Management Group, Dave Roberson

http://siliconvalleypropertymanagementgroup.com/tax-deductions-palo-alto-property-management/

4 Ways to Snag an Extra Tax Break

4 Ways to Snag an Extra Tax Break

Don’t miss out on these lesser-known credits and deductions.


Many homeowners have a general understanding of the home-related tax breaks that apply to them. Here are a few lesser-known areas where you may qualify for a credit or deduction.

Refinancing points

Did you buy a house last year? Then you likely know that you can deduct the points you paid to get your mortgage — in one fell swoop.

If you refinanced, however, you can’t do that. Rather, you have to deduct the points on the new loan over the life of the loan. For a 30-year mortgage, you can only deduct 1/30th of the points per year. If you had $3,000 in points, divide by 30 to deduct a paltry $100 in points each year. Every little bit helps, though.

Home energy credits

The tax credit that encouraged homeowners to save energy by installing insulation, storm windows, doors, roofs, and certain water heaters and qualified heating and air conditioning systems disappeared at the end of 2013. But there is one energy tax credit available for tax year 2014: the Residential Energy Efficient Property Credit.

If you installed items like a solar hot water heater, geothermal heat pump, or wind turbine, your credit could be worth up to 30 percent of the total cost. This credit is slated to stick around until 2016.

Premiums for PMI

If you’ve been paying for private mortgage insurance (PMI) every month because you put down less than 20 percent on your home, you may be able to recoup some of that money by claiming the PMI deduction on your federal return.

Keep in mind that the deduction, which is only for policies issued after 2006, expires with tax year 2014 unless Congress renews it. And the right to this deduction (which many homeowners don’t claim) disappears as your adjusted gross income rises from $100,000 to $109,000 (or $50,000 to $54,500 for those who use married filing separately status).

Simplified home office deduction

If you’re like most people who work at home, you probably don’t bother deducting your home office expenses because a) the rules are complex and b) you’re worried it will increase your chances of getting audited.

But have you heard about the simplified calculation method allowed by the IRS? Probably not — although the deduction made its first appearance in 2013. Just multiply the square footage of the part of the home used for your home office (up to a maximum of 300 square feet) by $5 a square foot. The maximum deduction is $1,500. It’s an easy, time-saving calculation, and it certainly beats figuring out your own expenses and pro-rating them (although that’s still an option if you prefer).



Source: Zillow Blog, Vera Gibbons
http://www.zillow.com/blog/snag-extra-tax-break-172718/

Tax Benefits of Homeownership

Great post from the Zillow blog, but I think he left out property taxes as something that is deductible on the homeowners income tax. Of course always check with your tax professional before taking advantage of any of these tax benefits.

Owning real estate can make tax season more complex, but many homeowners receive considerable benefits — especially if they sold a home or relocated for a job in the previous year. Here’s a look at three ways homeownership can pay off at tax time.

Mortgage interest

When you purchase a home, you will likely get a mortgage. Your monthly mortgage payment is made up of both principal (paying money to pay down the loan) and interest (what the lender charges for supplying the loan). As a way to incentivize homeownership, the federal government provides a tax benefit when it comes to the interest portion of your mortgage payment.

A homeowner can write off, dollar for dollar, the interest portion of their mortgage payment. Say, for example, a homeowner’s annual salary is $100,000. Their mortgage payment is $1,200 per month, and the interest portion of that payment is $1,000. At the end of the year, they have a $12,000 tax write-off. In essence, their taxable income is reduced to $88,000.

Capital gains

Homeowners also get a tax break when they sell their home. If you purchase your home for $200,000 and sell it for $400,000, you have a $200,000 gain — that’s income.

If you have an income by way of a job, a contract position or the sale of stock or mutual funds, you pay income tax on that gain. With homeownership, it’s different. If you are single and lived in the home for at least two of the past five years, you do not have to pay any income tax on that $200,000 gain — in fact, you don’t have to pay on gain up to $250,000. Married couples filing tax returns jointly and following the same owner occupancy guidelines are exempt up to $500,000. Where else can you generate income without paying taxes on it?

Tax credits for moving

If you purchase a home in one state and sell one in another, you should check with a CPA in both states. There may be benefits realized in one state but not the other, such as tax credits for moving expenses, if the move is a part of a job transfer. And, for the year you are between states, you will likely need to file a return in each state. It’s always smart to check with a CPA before a real estate transaction.



Source: Zillow Blog, Brendon Desimone
http://www.zillow.com/blog/tax-benefits-of-homeownership-171428/

When it comes to taxes, repairs and improvements aren’t always treated the same.

When it comes to taxes, repairs and improvements aren’t always treated the same.

When we bought our first house, it was perfect. Well, except for the 40-year-old heater. And the green kitchen with beige appliances circa 1970s. And the creepy basement. But otherwise perfect.

Over the years, we made a number of improvements. We also made a number of repairs. We replaced the roof, added a powder room, and replaced the front porch. We painted walls and swapped out windows and doors.

When we sold our house a few years ago, I still had a list of things that I had wanted to make happen that we never got around to doing. We never did refinish the basement or knock out the kitchen wall. I never got a new master bath. Like many homeowners, my husband and I weighed what we wanted to make happen against what needed to happen: time, money, and resale value were all factors.

When you pay for a repair or an improvement to your house, the immediate hit to your wallet is the same. However, how that repair or improvement is characterized determines whether you might get a break down the road.

Here are a few rules for sorting it all out.

What constitutes a repair?

For tax purposes, a repair returns your home to its previous condition but doesn’t necessarily make it better than before. To figure how the repair will be treated on your return, you’ll want to consider the nature and timing of the repair.

Repairs that you make simply to make your home look or feel better — like patching and painting the walls — offer no tax advantage: they’re tax neutral.

Repairs that you make following a fire, hurricane, tornado, or other disaster may be deductible under the casualty/loss rules. The rules can be complicated, but generally you can deduct the cost of a repair to return your property to the state it was in before the disaster.

What’s the difference between a repair and an improvement?

While repairs restore your home to its original condition, home improvements make it better and can boost the sale value. As a rule, you don’t get to take a tax deduction for increasing the value of your home — with a few exceptions.

If the improvement is to accommodate a disability, you can claim some or all of the cost as a medical expense. This would include, for example, the cost of a wheelchair ramp. If the cost of the home improvement does not increase the value of your home, you may claim the entire amount as a medical expense; if the improvement increases the value of your home, the difference would be a medical expense. Remember that the rules for medical expenses still apply, including the 10% floor.

What about energy-efficient upgrades?

If you improve your home using alternative energy, you may qualify for an energy tax credit — at least through 2016. The Residential Energy Efficient Property Credit is equal to 30% of the cost of qualified equipment. Qualified equipment includes solar water heaters, solar electric equipment, and wind turbines. There is no cap on the credit for most types of property and the improvements don’t have to be made to your main home.

Can updates to a home office be deducted?

If you make a repair to or improve part of your home that you use for business, including a home office or a rental, you can claim a deduction. You’ll want to make sure that the repair meets the criteria for business expenses to take the deduction. You may also have to deduct the cost over time, so check the rules carefully.

What if none of these circumstances apply?

All is not lost. If your home improvements are considered capital improvements, you may still get a break by increasing your basis for purposes of calculating a gain or a loss when it comes time to sell.

Here’s my rule of thumb for figuring capital improvements: if you can carry it out of your house (like that microwave), it’s not a capital improvement. If you can’t take it with you when you go (like that master bath), it’s probably a capital improvement.

Here’s how it works by the dollars. Let’s say I bought my house for $100,000. And let’s assume that I really did get around to adding that master bath at a cost of $10,000.

My new basis? $110,000. That’s $100,000 (purchase price) + $10,000 (adjustment) = $110,000. At sale, I would figure any capital gain (difference between selling price and basis) with an adjusted basis of $110,000.

The reality is that you can’t always plan your repairs or home improvements around your tax return. Leaky roofs and disabilities don’t always show up when it’s convenient. But knowing the rules ahead of time can help you ease the hit to your wallet — and help you time the improvements that you can control.

Source: http://www.trulia.com/blog/need-know-home-improvements-taxes/