Real Estate

September 22 2023

Your Home is a Bundle of Tax Benefits

Individual Taxes, Real Estate, Tax Break, Tax Law, Tax Planning, Tax Tips Tax Benefits

There are many tax benefits built into home ownership. Here is a review of the most common.

The home gain exclusion. When you sell an asset for a profit, it creates a taxable event. If the asset, though, is your primary residence, you can exclude up to $250,000 ($500,000 if married filing jointly) of these gains. Special rules do apply, but this is a major tax benefit of home ownership.

How to take advantage: You must live in your house for at least 2 of the previous 5 years to qualify for the home gain exclusion. Start planning now if you think you’ll be selling your house in the near future so you can qualify for this tax break.

Itemized deductions. Mortgage interest and property taxes are two deductions you can claim as a homeowner. The interest is deductible on the first $750,000 associated with loans secured by your primary and secondary residences ($1 million for mortgages underwritten prior to 2018), while up to $10,000 of property taxes may be deducted. You may also deduct points paid as an itemized deduction over the life of your mortgage.

How to take advantage: You need to itemize your deductions to take advantage of these tax breaks. Consider bunching your mortgage interest and property taxes with other itemized deductions such as charitable contributions, taxes and excess medical expenses to try and exceed the standard deduction for your filing status.

Free rental income. You can rent out your home for up to two weeks and not claim the income. While you cannot deduct expenses in this scenario, this is a great tax break if your home is located next to a popular landmark or a major event.

How to take advantage: Keep track of how many days you rent out your home so you don’t go over the 14-day limit. If you rent your house for just 15 days over a given year instead of 14, you’ll owe taxes on all rental income for that year, including the first 14 days.

Home office deduction. If you use a portion of your house exclusively as a home office, you may be able to deduct certain expenses such as mortgage interest, insurance, utilities, & repairs.

How to take advantage: To qualify for the deduction, you generally must use this portion of your house exclusively for business purposes on a regular basis. So be sure to understand the limitations of this deduction.

Your house is a great place to control the amount of tax you owe, but only if you know the rules and can apply these rules to your situation. Use this information as a starting point to see if there are ways to leverage your home’s tax benefits.

February 7 2023

Depreciation Recapture

Business Taxes, IRS Rules, Real Estate, Tax Law depreciation

One of the more unpleasant surprises that can hit a taxpayer occurs when you sell personal property, rental property or assets from your small business. This tax surprise is often associated with depreciation recapture rules.

Defined

Depreciation recapture refers to reducing the cost of an asset sold by prior period’s depreciation expense to determine whether taxes are owed on the sale of an asset and to determine the type of tax that must be paid on the sale of the asset.

When you have business property with a useful life of over one year, you often have the ability to deduct part of the cost of that property over the estimated useful life (recovery period) of that property. The most common users of these depreciation rules are small businesses and rental property owners.

When the asset is later sold the IRS wants you to determine if any tax is due as either ordinary income or as a capital gain.

A simplified example: Assume you run a small business out of your home. You purchase a new computer used 100% by your small business. The cost of the computer is $3,500. IRS rules determine you may recover the cost of this type of asset over five years. So each year you can deduct $700 as depreciation (1/5 of the cost of the computer assuming straight-line depreciation is used) on your business tax return.

Next assume the computer was sold at the end of year three for $2,000. This will result in a taxable event that includes depreciation recapture.

This example is simplified for clarity. Actual depreciation methods used will vary from this example. The ordinary income must be claimed on your tax return and is caused because of the depreciation taken in prior years. This illustrates the recapture of prior period depreciation.

When does it occur?

Look for the possibility of depreciation recapture when:

You sell rental property
You sell your home that you have used as a home office
You sell any property used within a small business

Warning: Understand the allowed or allowable trap

One of the land mines surrounding depreciation recapture rules is the concept of “allowed or allowable.” When calculating whether you owe deprecation recapture related taxes, the tax code requires that you adjust for depreciation whether or not you actually took the depreciation expense in prior years. So if you have assets that should be depreciated on your tax return, but are not, please call for a review of your situation.

What you should know

First and foremost, many unsuspecting landlords forget that years of depreciation on their property can impact their tax obligation when the property is sold. This can occur even if the sales price is less than what they paid for the property.

Secondly, the tax code applies different tax rates on ordinary income versus depreciation recapture versus long-term capital gains. The maximum tax rates on each are noted here:

Personal income tax:	37%
Depreciation recapture:	25.0%
Long-term capital gains:	20.0%

(excludes the impact of possible Affordable Care Act surtax)

Unfortunately, the tax laws in this area are fairly complex. The amount due can be impacted by;

Different depreciation methods
Use of Section 179 and bonus depreciation rules
Improvements made to property
Like-kind exchange rules
Asset class designations

Thankfully, you do not need to understand the complexities surrounding depreciation recapture rules. You simply need to know they exist and ask for assistance.

December 8 2022

Who should own our business building?

Business Tips, Real Estate, Tax Tips business real estate

Question: Should my corporation own our business building or should I own it personally?

Answer: If your business is incorporated, it is often a good idea to personally own the real estate occupied by your corporation.

If appreciated real estate is sold by a regular corporation, the gain will be subject to double taxation if the corporation distributes the money to you. However, if you own the real estate personally, there is no double taxation. Though the double taxation does not apply to S corporations, there can be problems when an S corporation sells its operating business and its real estate.

If you personally own the property, you can lease it to the corporation.

There are non-tax advantages of personal ownership of business real estate as well. Discuss the facts with us and your attorney before you buy business real estate or change the form of ownership on real estate you already have.

November 23 2022

Is the sale of my home taxable?

IRS Rules, Real Estate, Tax Planning Exclusions

Question: Is the sale of my residence taxable?

Answer: That depends on the amount of profit from the sale. Single taxpayers can exclude from tax up to $250,000 of profit on a home sale and married couples can exclude up to $500,000. To take the full exclusion, you must generally have owned and used the home as your principal residence at least two of the five years prior to its sale. Also, you can’t use the exclusion more than once every two years. A reduced exclusion may apply in some cases. Prior to selling your home it is important to review your situation.

November 22 2022

Passive Activity

IRS Rules, Real Estate, Tax Planning Passive Income, Tax Planning

A passive activity is a business activity in which a taxpayer does not materially participate.

Material participation defined. So just what is material participation? In general, material participation requires you to be involved in the operation of the activity on a regular, continuous, and substantial basis. If you do not meet this threshold, the activity is deemed passive in the eyes of the IRS.

Rental activity is generally passive. Any rental activity is generally a passive activity except for some very specific ones defined by a complicated calculation of hours spent in the activity. A limited partnership is generally considered to be a passive activity unless personal involvement meets a specified number of hours.

The passive activity rules. The complicated passive activity rules are in place to curb abuse by taxpayers who use tax-shelter losses to offset against their ordinary income (wages, interest, dividends, etc.). The rules create a separate tax basket for passive activities. The gains and losses from various passive activities are netted against each other within this basket. If the net result is a loss, the loss is generally suspended or carried forward to the next year where the process is repeated. In other words, the law generally eliminates the ability to offset ordinary income with passive losses until you dispose of an investment.

Proper tax planning dictates that you determine early on how your business activities will be viewed by the IRS. Thankfully, there are some exceptions when your income is low, but it requires planning and review.

November 15 2022

Are Mortgage Refinancing Costs Deductible?

Loans, Real Estate deductible, refinancing

Question: I refinanced my home mortgage this year. Can I write off the loan costs?

Answer: If you refinanced to consolidate your debts or to obtain a lower interest rate, you must amortize (write off) the points over the term of your loan. However, to the extent you used the loan proceeds to make improvements to your home, you can write off that portion of points this year.

If you’ve been amortizing points on a previous mortgage, you can write off the remaining balance of points in the year the loan is paid off.

November 8 2022

Thinking of Selling Your Home?

Real Estate, Tax Planning, Tax Tips Capital Gains, Exclusions

Understanding the Home Gain Exclusion

One of the largest tax breaks available to most individuals is the ability to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. Making the assumption that this gain exclusion will always keep you safe from tax can be a big mistake. Here is what you need to know.

The rule’s basics

As long as you own and live in your home for two of the five years before selling your home, you qualify for this capital gain tax exclusion. In tax-speak you need to pass three hurdles:

Main home. This tax term defines what a main home is. It can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
Ownership test. You must own your home during two of the past five years.
Residence test. You must live in the home for two of the past five years.
Some quirks.
- You can pass the ownership test and the residence test at different times.
- You may only use the home gain exclusion once every two years.
- You and your spouse can be treated jointly OR separately depending on the circumstances.

When to pay attention

You have been in your home for a long time. The longer you live in your home the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gains tax problem prior to selling their home.
You have old home gain deferrals. Prior to the current rules, home-gains could be rolled into the next home purchased. These old deferred gains reduce the cost of your current home and can result in capital gain exposure.
Two homes into one. Often newly married couples with two homes have potential tax liability as both individuals may pass the required tests on their own property but not on their new spouse’s property. Prior to selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.
Selling a home after divorce. Property transferred as a result of a divorce is not deemed a sale of your home. However, if the ex-spouse that retains the home later sells the home, it may have an impact on the amount of gain exemption available.
You are helping an older family member. Special rules apply to the elderly who move out of a home and move into assisted living and nursing homes. Prior to selling property it is best to review options and their related tax implications.
You do not meet the five-year rule. In some cases you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.
Other situations. There are a number of other exceptions to the home gain exclusion rules. This includes foreclosure, debt forgiveness, inheritance, and partial ownership.

A final thought

The key to obtaining the full benefit of this tax exclusion is in retaining good records. You must be able to prove both the sales price of your home and the associated costs you are using to determine any gain on your property. Keep all sales records, purchase records, improvement costs, and other documents that support your home’s capital gain calculation.

May 13 2022

Must I buy a more expensive home to avoid taxes?

Financial, Personal Planning, Real Estate

When I sell my home, do I have to replace it with a more expensive home to postpone taxes on the sale?

No. In fact, you don’t have to reinvest in another house at all. If you meet certain qualifications, you can use your sale proceeds for whatever purpose you choose – without having to pay tax on your profit in the sale.

The Taxpayer Relief Act of 1997 eliminated two longtime provisions in the tax law. Under the old rules, taxpayers age 55 and older had a once-in-a-lifetime opportunity to exclude $125,000 of gain on the sale of their principal residence. In addition, once every two years, you were allowed to roll over the gain from one house to the next as long as you purchased a replacement house of equal or greater value. Doing so allowed you to postpone tax on the gain.

Now, you can no longer roll over the gain from one home to another, even if you want to. And the gain exclusion for those age 55 and older no longer exists. However, individuals can exclude up to $250,000 of profit ($500,000 for married couples) if you meet certain requirements

July 17 2020

Deciding on a 15- or 30-year mortgage? Consider these factors

Real Estate

You’re in the market for a house. Let’s assume you find a great place that’s selling for $240,000 and meets all your criteria — safe neighborhood, good schools, big enough to accommodate your growing family, and close to your workplace.

With a 20 percent down payment ($48,000) and estimated closing costs of $3,000, you’ll need to cover the balance of $189,000 with a mortgage. So you talk to your banker and learn that you qualify for a 30-year mortgage with an annual interest rate of 4.8 percent.

You also qualify for a 15-year mortgage with a lower interest rate of 4.4 percent. Both mortgages are “fixed,” meaning the interest rate won’t change over the payback period.

Assuming that you plan to make monthly payments for the entire term of either loan, should you opt for the longer mortgage or the shorter? These three primary factors are worth considering:

Monthly payment. In this example, you’ll pay about $991 each month for principal and interest (excluding taxes and insurance) on a 30-year mortgage. Monthly payments for the 15-year mortgage will be about $1,436 (nearly 45 percent higher). Will your budget — both now and in the future — accommodate the higher payment required by a 15-year mortgage?
Total interest. Here’s where the 15-year mortgage shines. Because you make interest payments for half as many years, you’ll save over $98,000 (58 percent) in total interest over the course of the loan. This route may be ideal for people who know they won’t need to rely on the financial wiggle room smaller payments typically provide.
Flexibility. Under both scenarios, you sign a contract. You’re required to make monthly payments regardless of job losses, medical emergencies or other unforeseen circumstances. Should life throw you a curveball, the lower monthly payment of a 30-year mortgage may enable you to stay within budget and prevent foreclosure.

You may also consider making extra principal payments on a 30-year mortgage. You’ll pay off the balance sooner and retain a measure of flexibility.

August 14 2019

Moving? Here’s what you need to know

Planning, Real Estate

2018 ALERT: Unless your move is a qualified move related to military service, the moving expense deduction is no longer available. Use this information for filing prior year tax returns.

Moving is expensive, but if you maintain good records, you may be able to recover some of those costs through tax benefits.

Some of your moving expenses are deductible if your move is work-related. To be deductible, the distance from your old residence to your new workplace must be at least 50 miles more than to your old place of work. If you are starting work for the first time or after a long period of unemployment, your new home must be at least 50 miles from your old home.

If you meet the requirements, here’s what you may be able to deduct:

Costs of moving your household goods and personal effects to your new home.
Travel costs, including lodging while en route, from your old home to your new one.

Other Moving Tax Facts

The cost of meals during your move is not deductible.
The costs of pre-move house-hunting trips or living in temporary quarters in the new location are not deductible.
Qualified moving expenses reduce your adjusted gross income. This treatment means you can deduct moving expenses regardless of whether you itemize deductions or take the standard deduction on your tax return. Also, by reducing adjusted gross income, your moving expense deduction may make it easier for you to claim other deductions that are limited by adjusted gross income (for example, the deduction for medical expenses, casualty losses, and miscellaneous itemized deductions).
Reimbursement from your employer for substantiated moving expenses you incurred (and have not deducted in a prior year) is not subject to either income or payroll tax.
You should keep records, receipts, cancelled checks, etc., of moving expenses incurred because the IRS will not take your word for costs involved. You must be able to substantiate your moving expense or they may be disallowed.

After You Move

Notify all current-year employers for all members of the family so that W-2 statements and other forms arrive on time at your new location.
Review your insurance policies to make sure you still have the coverage you need. Your premiums may change on some insurance due to your new location. Find out when various policies expire so that you can get insurance in your new location without a lapse of coverage.
Check on pension benefits at both your old job and your new one. If you are entitled to money from your old company’s pension plan, get advice on the tax consequences of the various options relating to the funds.
Make an appointment for a tax planning session. You may be required to file tax returns in more than one state, and state tax laws vary. Schedule this session early to give yourself ample time to do tax planning.
Review your investment portfolio. Moving may require some adjustments. For example, if you own municipal bonds issued by your old state of residence, earnings on them will probably be taxable in your new state.
If you’ve moved to a new state, find out the laws governing property rights. Some states are community property states and, in general, consider husbands and wives to be joint owners of property acquired during their marriage. Other states are common law states and property ownership depends on title and the source of acquisition funds. Get the facts so you can arrange your affairs accordingly.
Have your will reviewed to see if changes are necessary. State laws vary; be sure your will still does what you want it to do.

Gilliland & Associates, P.C. is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.