The
following information should help you identify the tax implications
of buying or selling a home. But remember that this is capsulated
and not intended as tax advice. Also, tax laws change continually,
so seek the advice of your tax professional for complete tax
advice. But call Doebler Realty for professional real estate
advice.
Tax
Facts: Tax rates favor homeowners. Numerous deductions,
especially mortgage interest and property taxes, help lower
homeowners' taxable income. Here is the tax rate schedule
for income.
| Tax
Rate |
TAXABLE
INCOME |
| Single |
Married
|
| 15% |
$
0 to $ 26,250 |
$
0 to $ 43,850 |
| 28% |
$
26,250 to $ 63,550 |
$
43,850 to $105,950 |
| 31% |
$
63,550 to $132,600 |
$105,950
to $161,450 |
| 36% |
$132,600
to $288,350 |
$161,450
to $288,350 |
| 39.6% |
over
$288,350 |
over
$288,350 |
|
Rates
are different for married couples who file separately and
for heads of households. The effective tax rate may be higher
than shown because of limits on itemized deductions and
personal exemptions for higher incomes. Also, state income
taxes often increase your taxes by 5% or more.
Helpful
Hints: Many homeowners overpay taxes simply by
overlooking deductible items. Get one of many tax preparation
books available in bookstores that lists deductible items
to jog your memory.
Tax
Facts: Interest is fully deductible on home equity
loans up to $100,000 - in contrast to other types of loans
- regardless of how the proceeds are used. A home equity
loan, including a second mortgage or equity credit line,
is a loan secured by a primary or second home. The loan,
when added to other debt secured by the residence, can't
exceed the fair market value of the property.
Helpful
Hints: Interest paid on credit cards or other types
of personal loans is not deductible. For many owners, it
makes tax sense to pay off this kind of debt with a home
equity credit line or loan.
Tax
Facts: For home buyers, deductible expenses include
settlement charges for points. Deductible points are up-front
charges from the lender. One point equals 1% of the loan
amount. Points paid by either the buyer or seller are deductible
by the buyer in the year of purchase.
Helpful
Hints: The IRS announced in April 1994 that seller-paid
points can be deducted as a Schedule A mortgage expense
by buyers who purchased a principal residence since December
31, 1990.
Tax
Facts: Interest payments on a residential mortgage
- assuming the mortgage isn't larger than the purchase price
of the house - are fully deductible in most circumstances.
That's a key reason why home ownership is a superb tax shelter.
Mortgage interest on a second home is also deductible, as
explained in the Second Homes section below. If you own
a third home for personal purposes, the mortgage interest
is treated as "consumer loan" interest and is
not deductible. Interest on home equity loans (see Equity
Loans section) is deductible, with some limitations.
Helpful
Hints: If you are planning to buy a home with a
large amount of cash, consider carefully if you plan to
ultimately finance the property. For interest to be deductible
on a financing more than 90 days after closing, it will
be limited to the acquisition loan balance plus $100,000
under home equity loan rules.
Tax
Facts: Second homes and vacation homes have separate
tax rules depending on the owner's personal use days. A
residence is a second home if it is used personally more
than 14 days or 10% of the days it is rented (if rented
more than 140 days). It's a vacation home if personal use
is no more than 14 days or 10% of the days it is rented.
For
a second home, all mortgage interest and property taxes
are deductible as additional itemized deductions. If there's
rent income, other property expenses may be deductible,
but only up to the amount of the rent income (losses are
not allowed).
Owners
of vacation homes may claim rent expense deductions other
than interest and taxes, including depreciation of the property,
even if it results in a loss. When personal use of a vacation
home is involved, deductions are determined by allocating
expenses, including interest and taxes, between the rental
and personal use periods.
Helpful
Hints: if the property is vacant part of the year,
the courts support a method of calculating the portion of
interest and taxes (deductible as an itemized deduction
anyway) charged to the rent activity that is very favorable
to the taxpayer: multiply total interest and taxes by the
percentage of total rent days divided by 365. See your tax
advisor about this. Once you exceed the maximum personal
use days described above, you'll get the largest tax deductions
by increasing your personal use days in relation to rental
days.
Tax
Facts: Real property taxes and state and local
income and personal property taxes are fully deductible.
Helpful
Hints: If you sold or bought property during the
year, you may have paid real estate taxes without being
aware of it. See closing statement for any prorations.
Tax
Facts: If you moved to a new home because of a
new job or a job transfer, you may qualify for a moving
expense deduction. The distance between the old home and
the new job must be at least 50 miles more than the distance
between the old home and the old job. The location of the
new home is not considered. Whether a homeowner or renter,
you may deduct the cost of moving household goods and the
direct cost of moving you and your family. You may deduct
expenses for lodging during the move but not the cost of
meals.
Helpful
Hints: While Realtors' commissions, lawyers' fees,
and other closing costs are no longer deductible, these
costs can reduce capital gains by adding to the cost basis
or reducing the adjusted sale price. See IRS Publication
530, "Tax Information for Homeowners."
Tax
Facts: The profit on selling a home owned is a
capital gain, subject to federal and state capital gains
tax. The profit, or capital gain, is reduced by the original
cost of the property, selling expenses and outlays for improvements
over the years of ownership.
The
tax law enacted in 1997 provides tax relief on the sale
of your home. You may avoid paying taxes altogether on the
first $250,000 (for single taxpayers) or $500,000 (for married
taxpayers) of gain realized at sale.
This
rule replaces both the "rollover exclusion" that
allowed you to avoid tax so long as you purchased a new
residence at equal or greater price than the old one, and
the "over-55 exclusion" that provided a one-time
$125,000 exclusion on gain if you were 55 of older at the
time of sale.
To qualify
under the new rule, you must have owned the home and occupied
it for any 2-year period out of the last 5 years prior to
selling. You can only use this provision once every 2 years,
but if you move after a shorter stay than 2 years due to
a job change or health problem, you can prorate the credit
for the time you actually owned/lived in your home.
Gains
above $250,000 / $500,000 are taxed at a 20% capital gains
rate, down from the former 28% rate.
Helpful
Hint: Contact your tax preparer for more information
about this new law. You should continue to maintain records
of improvement expenses in the event your gain exceeds the
$250,000 / $500,000 profit cutoff.
Tax
Facts: If you have adjusted gross income of $100,000
or less (not counting any loss from "passive activities,"
deductions for IRA contributions or taxable Social Security
benefits), you may deduct up to $25,000 in losses from rental
real estate against income from other sources - as long
as you own at least 10% of the property and "actively
participate" in its management. (If you choose the
tenants and approve outlays for maintenance, for example,
that's considered "active" participation.) If
your adjusted gross income is between $100,000 and $150,000
you may still deduct some or all of your losses from rental
real estate, depending on the amount of the loss.
Helpful
Hints: Don't forget that if any rent losses were
"suspended" in prior years, they are fully deductible
in the year the property is sold.
Tax
Facts: Depreciation is an expense deduction that
allows the taxpayer to deduct capital investments in income-producing
activities. A homeowner might decide to turn a second home
into rental property, for example, and would then be able
to claim a depreciation deduction. Residential structures
put in service after December 31, 1986 are depreciated over
27 years using the straight-line method (equal amounts of
depreciation deducted each year). Property already in service
before that date continues the method already in use.
Helpful
Hints: Depreciation provisions are changed frequently.
What's more, it's often confusing as to what constitutes
a repair versus a capital improvement. Before making large
outlays to buy or improve a rental property, consult your
tax advisor to find out what portion of your costs are capitalized
and depreciated, and what portion are treated as expenses
for tax purposes.
| 1031
TAX-DEFERRED EXCHANGES |
Tax
Facts: Section 1031 of the Internal Revenue Service
Code allows investors to defer (postpone) paying income
taxes on gains from the sale of investment real property
if the proceeds are reinvested into "like-kind"
property. In order to qualify, the old property must have
been held for investment or for productive use in a trade
or business. Details follow:
-
Like-kind property means real estate investment
property: vacant land, rental property, office building,
etc. Residences do not qualify.
-
You must exchange up in value or equity in order
to fully defer taxes. If you exchange down in value
or equity, you will have received non-qualifying
property ("boot") and tax is computed
on the amount of boot received.
-
In the past, it was a requirement that you exchange
the old and new property simultaneously. Today,
delayed exchanges are common provided you meet specific
requirements: you must use a "facilitator"
to coordinate the sale and buy, you must identify
3 potential new properties to buy within 45 days
after selling the old property and you must close
on the purchase of one of those 3 properties within
180 days after selling the old property.
|
Helpful
Hints: Remember that this is not available on your
residence. Because of the stringent requirements, professional
tax counsel is essential. Tupper can direct you to capable
local advisors in the Evergreen/Conifer area.
