There are several taxation issues that revolve around Real Estate, Housing, and Taxes. Here will take an good look at some of the main ones. Please note, I'm not a CPA or Tax Professional, but these items are generally true for most peoples tax situations. Your situation may be special, or different, so you should always consult a professional to see if and how they apply.
The Homeowner Tax Deduction on the Interest of your Mortgage
This is the most well understood tax deduction. A good reference is here. The key points to remember are:
1) The younger your loan, the more you'll deduct. Because of how reverse amortization works, the interest is front loaded, so you pay more interest on loans you just made than old loans that you had transacted many years before.
2) It's just the interest. You can't deduct principle.
3) There are caps - it's not an unlimited deduction, but most of us won't hit the caps.
4) You can deduct other charges, including mortgage insurance (not housing insurance!) and points. Those are great deductions if they fit your situation.
The Home Tax Deduction on the Capital Gain of the Sale of Property
This one is easy - but hugely important. Each time you make a gain on the sale of your primary residence, you don't have to pay tax on the gain - up to 250,000 for singles, or $500,000 for married couples. It's probably the best way to build up your retirement without Uncle Sam getting a big bite. More here. Now you need to live there, it has to be at least two years, (you can't flip the property) and there are other rules that are in place to avoid abuse. But it's probably the best reason to own property, and certainly an argument to stretch a little bit.
The next section is for Investors, which we will define as people who own property that they don't live in.
Depreciation of Investment/Rental Property
The best tax advantage of owning rental property is depreciation. You get to depreciate the building, (not the land, land doesn't depreciate, only physical assets do). over the IRS determined timeline of 27.5 years. So if you have a $275,000 building, on a lot of $100,000, you can deduct $10,000 in depreciation a year as part of the business of renting. Let's say that building makes 7,000/ year in cash flow. With the depreciation factored in, for tax purposes it's actually a 3,000 LOSS, and can be deducted off your taxes. It's not all good news though...
Gain on Investment Property
The more you deduct, the greater the gain you will likely have when you sell the property, and you will have to pay taxes on the gain when you sell. Hopefully, the gain is sufficient enough that the taxes are just a small bite. But the IRS will get their share of that particular deduction.
Expenses on Investment/Rental Property
Most of these can be deducted in part or in full as part of your expenses for owning rental property
-Mortgage Interest
-Realtor Fees for finding tenants
-Cost of Credit Checks and the like
-Repairs: In general, repairs are tax deductible.
-Travel: In general, the cost to go to and from the rental property is deductible. You can deduct mileage or actual expenses.
-Casualty Losses
-Condo Fees, if the property is a condo.
And of course, depreciation, as noted in the previous section.
1031 Exchange and Gains on Investment Property
One of the main purposes of a 1031 Exchange is to defer the any gains on Investment property that you have made. Quickly, a 1031 exchange is when you sell one investment property, and buy another investment property that costs the same or more (many rules apply). When done under a 1031 exchange, the IRS considers the transaction to be essentially irrelevant, and therefore exempt from many of the taxes that might be due if you had simply sold the property and bought another, without doing a 1031 exchange. For example, if you owned a property that was purchased for 300K, and had depreciated 100K, and the building was now worth $330K, you'd be looking at a gain of about $130,000. However, if you do a 1031 exchange, where you sold the property (at 330K) and bought another with the proceeds (at 350K), you can defer the entire gain in a properly executed 1031 exchange. It has even greater advantages for inheritance planning, as 1031 exchanges can extend past the life of the individual investor.
More Information on Tax Related Real Estate Information
Investment Tax Deductions
As with any tax advice, consult professionals before taking any course of action, to avoid penalties and other fees or issues with the IRS. Specific questions welcome, I'll be happy to chase down information on them. Love to get an FAQ going on this topic!
Do Good Things Today! Matt Heisler
*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.
