There are generally two primary reasons for owning a home: for consumption purposes and for investment purposes.  It is crucial to reap all of the tax advantages available to you as a homeowner.

 

The IRS allows you to deduct the entire amount of interest paid on your home loan plus property taxes paid on your yearly income tax return, as long as you complete a Schedule A on your 1040, the loan is in your name, and the mortgage must be secured by collateral, usually the home itself.

 

Many homeowners are also taking advantage of the aility to consolidate credit card debt and roll it into a home equity loan.  The main advantage to this approach is being able to deduct the interest on the home equity loan as the first mortgage deduction rules apply.  Interest on credit card debt is non-deductible and the rates charged are typically higher than that of the current rates charged on home equity loans. 

 

Internal Revenue Code 121 states that when you sell your home, $250,000 of the profit or equity you've gained on your investment over the time you've owned that home, is tax free if you are single and doubles to $500,000 if you are married and file a joint tax return, as long as you have lived in the home for at least 2 of the last 5 years and it is your primary residence.  You will pay a long-term capital gain tax at a 15% Federal tax rate plus 9.3% State tax rate on the balance of your gain, or almost 25% overall. You are allowed to take advantage of IRC 121 if you sell again after living in the new home for two years.

 

Owners who sell an investment property (one that's not owner-occupied)  before they've held it for one year are required to treat the sale as a short-term capital gain and pay tax at ordinary income tax rates.  The rate can go as high as 35% depending on the person't tax bracket.  That means one could lose much of their gain.  If the property is held for a year or more before selling, the proceeds are considered long-term capital gains and are taxed at a 15% rate, plus the 9.3% state tax rate.

 

One way to defer any tax obligation on the sale of investment property is to transfer the proceeds into property equivalent or greater in value under Section 1031 of the Tax Code.  Owners have up to 45 days to identify a comparable property and 180 days to conclude the transfer. Please read the section below regarding 1031 Exchange rules or attend one of my free seminars to learn more about the process. 

 

There are strategies to convert a primary residence to an investment property to qualify for a 1031 Exchange.  If you live in a multi family dwelling, renting all but the unit you occupy, you can use IRC 121 and IRC 1031. Contact me for more information on how you can use this super tax break with your primary residence!

 

 

 

A 1031 Exchange is one of the most powerful tax deferral strategies remaining available for taxpayers.  The advantage of a 1031 exchange is the ability of a taxpayer to sell income, investment or business property and replace it with like-kind replacement property without having to pay federal income taxes on the capital gain on the transaction.  Although a personal residence is not a qualifying property, it can become an income or investment property and then qualify for a 1031 tax deferred exchange.  Contact me for more information on how.

 

The "new" property may be purchased at the same time, before or after the origional property is sold. Fees for a reverse exchange are much larger than a forward exchange, I recommend the forward exchange when ever possible.  An exchange intermediary becomes involved to handle the transaction and one has 45 days to identify the property to be exchanged and 180 days from close of escrow on the relinquished property to close on the replacement property.

 

For those investors who are engaged in 1031 Exchange looking for a suitable replacement property, there is a new and innovative investment option called a Tenants In Common investment or TIC. It offers a fractional ownership in a residential or commercial property. Here, each Tenant In Common investor, limited to 35, possess an undivided, or "common" interest in the property.

 

In 2002, the IRS issued guidelines governing the structure of these innovative property investments and TIC's have become increasingly popular with savvy individuals interested in buying into large residential or commercial properties traditionally reserved for a larger institutional investor. Many TIC investments can potentially lead to passive, long-term income while eliminating the hassle of active property management.

 

 

The gain on the sale of your home is simply the sales price, minus the price you paid when you purchased the property, also called the cost basis. To reduce the amount of gain reported, you are allowed to increase the cost basis of the property by adding the cost of capital improvements made during your ownership, to the price you paid when you purchased the property.

 

The IRS defines Additons and Improvements as; projects that add to the value of your property, prolong its useful life, or adapt it to new uses. Examples include: room additions, landscaping, new roof, insulation, new furnace or air conditioner, remodeling, etc. The cost of routine maintenance or repairs to your home may not be included unless they are part of an extensive remodel project. You must keep your receipts to file with your tax return in the year you report the sale of your property.