Homeowners Rejoice Tax Breaks Are Here

Homeowners Rejoice Tax Breaks Are Here

Homeowners Rejoice: Tax Breaks Are Here....
Let's be honest: April 15th is​ a​ day of​ reckoning,​ the​ moment when we find out what we really owe for taxes .​
In households nationwide wallets are drained and many who were rich on​ the​ 14th are greatly impoverished by the​ 16th .​
But for those with real estate the​ load is​ made lighter by tax rules which encourage the​ ownership of​ homes and investment property .​
Such rules are not only good for homeowners,​ they're also good for the​ country: About 20 percent of​ all economic activity nationwide is​ related to​ real estate,​ so policies which encourage real estate activity help everyone .​
It seems that almost every year changes to​ the​ tax code require the​ production of​ new forms and a​ re-education process .​
That said,​ the​ real estate basics remain in​ place and they're good news for buyers,​ sellers,​ borrowers and owners .​
Mortgage interest is​ generally deductible .​
The IRS says there are three categories of​ deductible home mortgage interest:
Mortgages you​ took out on​ or​ before October 13,​ 1987 (called grandfathered debt) .​
Mortgages you​ took out after October 13,​ 1987,​ to​ buy,​ build,​ or​ improve your home (called home acquisition debt),​ but only if​ throughout 2018 these mortgages plus any grandfathered debt totaled $1 million or​ less ($500,​000 or​ less if​ married filing separately) .​
Mortgages you​ took out after October 13,​ 1987,​ other than to​ buy,​ build,​ or​ improve your home (called home equity debt),​ but only if​ throughout 2018 these mortgages totaled $100,​000 or​ less ($50,​000 or​ less if​ married filing separately) and totaled no more than the​ fair market value of​ your home reduced by (1) and (2) .​
Substantial profits can be sheltered when a​ prime residence is​ sold .​
When a​ prime residence is​ sold,​ up to​ $500,​000 in​ profits can be sheltered from federal taxes if​ married,​ $250,​000 if​ single,​ providing the​ home has been used as​ a​ prime residence for two of​ the​ past five years .​
Generally this deduction cannot be used more than once every two years,​ according to​ the​ IRS .​
There are also provisions which may be helpful to​ individuals who must sell a​ prime residence in​ less than two years .​
Under the​ 2004 safe harbor rules,​ individuals may be able to​ get some capital gains relief under certain circumstances,​ such as​ being forced to​ move because a​ job has been relocated at​ least 50 miles or​ a​ home that must be sold because of​ multiple births resulting from the​ same pregnancy .​
Also,​ individuals in​ the​ Armed Forces and the​ Foreign Service may be entitled to​ special consideration under the​ Military Family Tax Relief Act of​ 2003 (MFTRA) .​
For instance,​ you​ may have longer to​ take a​ capital gains deduction or​ to​ amend a​ tax return .​
There are other provisions under MFTRA that also may be helpful,​ so check with a​ tax professional for specifics .​
Points may be deducible by both buyers and sellers .​
Picture a​ situation where a​ home is​ sold for $500,​000 and the​ owner -- to​ help close the​ sale -- offers to​ pay 1 point for the​ buyer .​
If the​ property was financed with a​ $350,​000 mortgage,​ a​ point would be worth $3,​500 .​
According to​ the​ IRS,​ the​ seller cannot deduct these fees as​ interest .​
But they are a​ selling expense that reduces the​ amount realized by the​ seller .​
Interestingly,​ in​ this situation the​ buyer can also deduct the​ points when the​ home is​ sold .​
The buyer,​ says the​ IRS,​ reduces the​ basis of​ the​ home by the​ amount of​ the​ seller-paid points and treats the​ points as​ if​ he or​ she had paid them .​
In effect,​ the​ seller gets to​ write-off the​ $3,​500 cost by reducing any profit from the​ sale .​
The buyer essentially lowers the​ purchase price of​ the​ property when the​ home is​ sold at​ some point in​ the​ future -- thus increasing the​ size of​ any profit .​
However,​ since up to​ $500,​000 in​ sale profits may be untaxed,​ most buyers will effectively never pay a​ tax on​ the​ seller's contribution for points .​
If a​ prime residence is​ refinanced then the​ deal with points is​ different: the​ expense of​ a​ point must deducted over the​ life of​ the​ loan .​
If the​ home is​ sold before the​ loan term ends,​ then any undeducted cost for points can be used to​ reduce owner's profit from the​ sale .​
Home offices may be deductible .​
If a​ portion of​ your home is​ used regularly and exclusively as​ your principal place of​ business or​ for the​ convenience of​ your employer it​ may be possible to​ write off a​ portion of​ such costs as​ mortgage interest,​ property taxes and utilities .​
There are a​ number of​ tests which must be met to​ take this deduction,​ see IRS Publication 587,​ Business Use of​ Your Home for details .​
In some cases there may be tax advantages associated with not deducting your home office in​ the​ year or​ two before you​ move .​
Speak with a​ tax professional for specifics .​
Natural Disasters
The Katrina Emergency Tax Relief Act of​ 2018 provides extensive tax benefits and assistance to​ those who were victims of​ hurricanes Katrina,​ Rita and Wilma .​
For details,​ go to​ the​ IRS Katrina relief page or​ call 1-866-562-5227 .​
If you​ have been in​ a​ natural disaster -- a​ flood,​ hurricane,​ tornado,​ etc.,​ contact your local congressional office to​ see if​ special tax help is​ available .​
Links to​ congressional offices can be found by pressing here .​
Investment real estate can generate substantial write-offs .​
If you​ own rental property you​ must seek a​ fair market rental for your property .​
You may generally deduct mortgage interest,​ property taxes,​ repair costs,​ management by an​ outside party,​ depreciation,​ advertising,​ insurance,​ utilities,​ legal services and other expenses .​
It's possible with rental properties to​ have both a​ positive cashflow and a​ loss for tax purposes .​
However,​ the​ ability to​ use real estate losses to​ reduce overall taxes may be phased out as​ income rises above $100,​000 .​
If a​ rental involves relatives special rules and restrictions may apply .​
Check with a​ tax pro for details .​
A 1031 exchange may allow investors to​ defer all capital gains taxes .​
With a​ 1031 transaction,​ investment property is​ exchanged for like real estate .​
The basic requirements are that within 45 days after the​ relinquished property has been sold,​ a​ replacement property must be identified .​
The identified replacement property must then be acquired within 180 days after the​ sale of​ the​ relinquished property .​
What's important about a​ 1031 exchange is​ that the​ capital gains tax on​ the​ relinquished property is​ deferred -- but it​ does not disappear .​
What really happens is​ that the​ basis for the​ new property (the replacement property) is​ reduced by the​ adjusted value of​ the​ relinquished property (the old property) .​
A 1031 exchange is​ complex and requires the​ services of​ a​ qualified intermediary .​
Among other tasks,​ a​ qualified intermediary holds the​ money from the​ sale of​ the​ relinquished property and applies it​ to​ the​ purchase of​ the​ replacement real estate .​
This must be done because under the​ rules for 1031 exchanges,​ the​ seller of​ a​ relinquished property cannot touch money from the​ sale -- it​ must be held by the​ qualified intermediary .​
Accounting for a​ 1031 exchange is​ also complex .​
Essentially there is​ a​ need to​ figure out the​ sale value of​ the​ relinquished property,​ add back depreciation and account for financing .​
Ed Horan,​ a​ well-known exchange authority and the​ author of​ How to​ Do a​ Like Kind Exchange of​ Real Estate,​ has posted a​ free 13-page exchanging guide with an​ accounting worksheet that's well worth reviewing before meeting with a​ tax pro .​
Sources and Publications
As always with taxes,​ nothing is​ ever simple or​ easy .​
Speak with a​ qualified tax professional for specific advice -- an​ enrolled agent,​ a​ CPA or​ an​ attorney who specializes in​ tax issues .​
Also,​ the​ IRS itself has excellent information at​ its website,​ www.irs.gov,​ by phone at​ 1-800-829-1040 and with specialized publications such as​ those below:
Publication 523,​ Selling Your Home
Publication 527,​ Residential Rental Property
Publication 530,​ Tax Information for First-Time Homeowners
Publication 535,​ Business Expenses
Publication 587,​ Business Use of​ Your Home
Publication 936,​ Home Mortgage Interest Deduction
Publication 946,​ How to​ Depreciate Property

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