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Real Estate Tax Deductions
Ask the expert
You may be entitled to a tax break and tax refund(s) if your property (house, vehicle, or business) was affected by natural disasters (flood, hurricane, volcano, tornado, or fire) and you were not fully reimbursed by insurance or FEIMA, as was experienced by some of our clients in the aftermath of Hurricanes Andrew in 1992, Katrina in 2005, Ike in 2008, and Sandy in 2012.
Real Estate taxation is a big niche market for Barry's Accounting Services. The firm provides services to clients in 13 states. Almost every client of the firm owns real estate or share equity, with 85% of the firm's clients owning two or more properties locally and in other states. Hundreds of tax returns are prepared for them and absentee owners annually. You will receive straightforward answers, impeccable service, and results that are unmatched in this industry.
Clem Barry has worked in the real estate industry for many years. He has been practicing taxation for over 25 years, and he is also an insurance broker. He is always busy preparing pre-sale tax projections, pre-foreclosure tax projections, and/or financial statements and 421(a) & (b) city tax exemption audits for real estate owners and their attorneys seeking mortgage modification or maintaining city status.
Buying any property ("A word to the wise is good enough")
1) Make sure you understand the laws of the state(s) or countries. Some states have recourse laws and some countries may allow you to buy a house but not the land.
The benefits of owning residential property
The benefits of owning rental property
It is not unusual for taxpayers to own several rental properties locally and in other states. In order to enjoy the benefits (including the maximum tax breaks) and remain solvent, owners of rental property must be organized and they must operate the property like a business. They must have a system that is designed to record and monitor income and expenses and a plan that can help them maintain cash flow and adequate working capital (resource integration).
Kinds of Property and Real Estate Transactions
The properties at issue are: residential (single family, condos, co-ops, and vacation homes), mixed-use, commercial, industrial, and undeveloped lands. The focus is on bank and creative financing, acquisition, loan origination, packaging, mortgage and insurance underwriting, loan warehousing, adjusted basis, operation, sale-leaseback, leasehold improvement, lease inducement payment, lease-term contracts, uniform capitalization, passive loss, debt restructuring, income from discharged of indebtedness, non-business bad debts, asset impairment, environmental remediation costs, riparian rights, cost segregation vs. total cost, exchange & transfer of rental property in marital dissolution, transfer of property from a parent to a child, Section 121 exclusion for sale of property, Section 1031 exchange of property, contract price, sellers concession, second mortgage, adjusted sale, recapture, installment method of reporting gain, and foreclosure or repossession of property.
Tax Breaks For Residential Property
Get Form(s) 1098 mortgage statement from your bank. You should receive this form from every bank or mortgage company that you paid during the year. If you did not receive a form 1098 statement by January 31, call the bank or mortgage company for the information. The mortgage interest, property tax, town tax, school district tax, county tax, and/or village tax, and points (loan origination and loan discount fee) that you paid are tax breaks. If you own a CO-OP and you paid the monthly maintenance fee, you are entitled to a proportionate share of the mortgage interest and real estate tax that the housing corporation paid on the building (IRC section 216). This is in addition to the mortgage interest and real estate tax deductions that you have received from your mortgage company or bank. You must report the actual figure on your tax return. Tax preparers are not allowed to use estimates of these amounts on your tax return.
Tax Breaks For Rental Property
Get Form(s) 1098 mortgage statement from your bank. You should receive this form from every bank or mortgage company that you paid during the year. If you did not receive a form 1098 statement by January 31, call the bank or mortgage company for the information.
1) You must report the amount of rent that you actually received or collected from each property during the year [IRC Sections 61(a)(5), 109, and 856(d)(1)].
2) You should prepare an itemized list of rental expenses that you paid during the year for each rental property you own (IRC Sections 163, 164, and 212), such as: mortgage interest, property tax, school district tax, county tax, village tax, water, gas/oil, electricity, insurance, eviction fees, advertising vacant apartment(s), extermination, cleaning and maintenance, boiler repairs, carpeting, management fees, and travel to the property. Minor repairs for plumbing, electrical, and carpentry are deductible in full in the year paid (Treasury regulation 1.162-4). Equipment and capital improvement such as new boilers, refrigerators, stoves, central air conditioning, new bathrooms, complete renovation of apartments and kitchen, including structural improvements made to the property, such as a new roof, sidewalk, driveway, garage, fence, and basement are depreciated and deducted annually over a period of 5-15 years [IRC 262 and 280(A), and Treasury regulation (regs.) 1.280A-3(d)(3)]. Lodging, meals, and utilities that you furnished to a Super and his dependents are treated as furnished as a condition of employment. These amenities are tax-free to the Super. They must not be included in his gross income and they are not deductible by you, the employer [IRC Section 119(a)(2)].
Sale, foreclosure, or destruction of your residence
You do not have to pay tax on $250,000 or $500,000 of profit that you obtain from the sale or destruction of your principal residence by hurricane, tornado, threats of condemnation, or eminent domain if you own the property for at least five years and live in it for at least two years. You can claim this exclusion once every two years (IRC Sections 121 and 1033). You can receive a reduced exclusion if you sell your residence earlier and the sale was due to divorce, unemployment, poor health, acts of vandalism or terrorism, a change in employment, or self-employment status that makes it difficult for you to pay your mortgage and living expenses. A reduced exclusion is based on the number of days that you owned and occupied your residence divided by 730 days, or the number of months you owned and occupied your residence, divided by 24 months, multiplied by the exclusion of $500,000 or $250,000 based on your filing status at the time of the incidence or occurrence.
If your principle residence was destroyed or condemned, you may have to purchase a replacement property within two years to offset the recognized gains. If a lender has foreclosed on your property, your gain or loss for tax purposes is the difference between the net proceeds that the lender received at the auction and your adjusted basis in the property [IRC 856(e)(1) and 1001]. Your attorney or insurance company should give you copies of these settlement papers. Take the documents along with you at your tax interview.
You can deduct a maximum of $3,000 on your tax return annually if you paid a contractor or developer to build your house and you and other homebuyers lost your money because the contractor filed bankruptcy. This is a non-business bad debt [IRC Section 166(d)(1)(B)]. To qualify for this non-business bad debt deduction, you must show proof of contract, original cancelled check(s), and a letter from the bankruptcy court or from the contractor's attorney.
Note: You can avoid losing your money to a contractor or developer by checking their history for lawsuits and bankruptcies and ensuring that they carry contractor's general liability insurance (CGL) and Payment & Performance bonds and your name is endorsed on the policies. I am an insurance broker, so I know that.
Sale of rental or commercial property
If you sold a rental/commercial property, you may have to pay capital gains tax on the profit or on the amount of the depreciation taken (IRC Sections 1231, 1245, & 1250). However, you can avoid paying tax on capital gains and instead pay tax on ordinary income if you sold your rental property to a relative (IRC 1239). If you are not qualified to use this method, then you may use the installment sales method to spread the capital gains and your overall tax burden over several years if you received a down payment from the buyer and you hold a note or second mortgage for the balance of the sale — Seller finance (IRCC Section 453). You may also qualify for non-recognition of capital gains tax through a Section 1031 like-kind exchange transaction. This tax strategy allows you to reinvest your entire profit into a new property without paying capital gains tax. Section 1031 exchange transaction must be completed within 180 days (six months) after the transfer of the exchange property.
Section 1031 exchange, business, or investment property
Section 1031 exchange, principal residence
Tip: If you owned a personal residence for at least five years and lived in it for at least two years, and the residence was rented out to a tenant at the time of the exchange, then you can claim both the section 121 exclusion of $250,000 or $500,000 and the Section 1031 non-recognition of gain. Isn't this a nice loophole?
Section 1031 transactions are complex. It is important that you retain the services of a real estate attorney to construct your transaction within Section 1031 exchange rules because you can be audited and indicted for tax evasion. If you need help setting up a Section 1031 transaction, please call the following tax attorneys.
Note: You could save a lot of money if you established a C corporation for buying, holding, and selling real estate. You transfer, develop, and sell the land as part of the inventory of the corporation.
What is the basis of my new residence in the exchange?
Here is the answer to your Section 1034 trade-in transaction. IRC Section 1034(e) requires the basis of a new residence be reduced by the amount of gain realized on the sale of a former residence. The adjusted basis of your new residence is $246,500.
IRC Section 1034(a) has provided for the non-recognition of gain in the exchange. The adjusted basis of the new residence for future tax purposes is equal to the purchase price of $400,000 + $2,000 attorney's fee less $155,500 of non-recognized gain.
The mortgage company should pay you ($380,000 - $39,200 - $340,550) = $250
Your tax-free capital gains is ($380,000 - $39,200) - ($315,000 + $19,800) = $6,000