The tax laws are spring-loaded to help you if you own real estate, but be careful. If you are not deft enough at your taxes, you could lose a bundle in missed deductions or end up paying ordinary income tax when it should be capital gains or excluded altogether. This is a high altitude review of the situation that will help you see the terrain and learn when to call for help. I am attempting to reduce thousands of pages of statutes, rules, and administrative interpretation into about 900 words, so hold your breath and dive in. My apologies for a dry subject, but this is all about money coming out of or going into your wallet, so let's go to the attack. First things first-do not attempt any of these maneuvers without the careful review and advice of a certified public accountant (CPA).
As you know, if you own your residence and you have a mortgage, you can usually deduct the interest from your taxes. Yes, there are exceptions if you make too much money, but you probably won't need to worry about that. There are also special rules for you if you make money or lose money on the sale of real estate. Beginning with these basic assumptions, let's take a closer look:
• Interest on home equity lines of credit is normally deductible even if the money is used to pay off personal debts. These are little mortgages that can be used to help purchase a house or deliver cash to you secured by the equity in your home.
• Points paid at closing are partially deductible and often must be amortized over several years. If they are discount points, sometimes They are 100 percent deductible
during the year incurred.
• Casualty losses, such as flood damage-to the extent not covered by insurance-can be deductible for the year they were incurred. Costs to repair ordinary wear and tear are usually not deductible.
• Property taxes paid to the state or local governments are deductible.
• Interest and taxes on second homes are normally deductible.
• Sale of a residence that is an investment property (you don't live in it) can create gain that is ignored by the Internal Revenue Service (IRS) but only if you anticipate the sale, set up a Section 1031 exchange, identify a new investment property within 45 days, and close on its purchase within 180 days.
• If you are using a Section 1031 exchange, beware of becoming a dealer. Becoming a dealer usually translates into your needing to hold title as a limited liability corporation or corporation.
• If you sell the house in which you have lived for more than 2 years, and if within 2 years you do not purchase another residence, you will have a capital gain that is recognized only if, and to the extent, it exceeds $250,000 ($500,000 if married filing a joint return). This amount is the exclusion available for the sale of your house. It can occur as often as you like, assuming you meet the basic criteria.
• A loss on the sale of a personal residence is a nondeductible personal loss.
• If you invest in an improvement on your house you cannot deduct the costs, but you certainly have increased your basis in the property. Your basis counts as part of your cost when it comes time to calculate your gains when you sell.
• You can use part of your house for a business and deduct some of its costs.
• Unless you are using part of the house for a qualified business office, your utilities, such as heat, water, and electricity, will not be deductible.
• You can convert your residence into a Section 1031 exchange property by moving out and beginning to treat it as an investment property.
• If you use a Section 1031 exchange to defer taxation, you will absolutely need to use a " qualified intermediary" who will hold your property while you find the next one to acquire in the exchange. Stewart Title Guaranty Company is a major title insurance company in America, and they own a professional, qualified intermediary named Asset Preservation Incorporated. Their fees are very reasonable, and you should talk to them because they are among the best. You can find them and their competitors on the web.
• If you sell your house within 1 year of your purchase and you receive a gain or profit on the sale, you will pay ordinary income taxes on the gain.
• If you sell your home after more than 1 year of ownership and you have a gain in excess of the exclusion (see exclusion note above), or if the exclusion doesn't apply (maybe because you have held it for less than 2 years), you will pay capital gains tax. The capital gains tax will probably be 10 percent if your tax rate is 15 percent, and 20 percent if your tax rate is 28 percent or higher.
If you really want to get to the precise language of the statutes or rules, the publications themselves will provide you with cites. Once again, please do not try any of these tax maneuvers without adult supervision-call your CPA now.
Thomas McKnight Article Source: http://EzineArticles.com/?expert=Thomas_McKnight |
