Broker. Federal Income Tax Laws Affecting Real Estate. Chapter 14. Copyright Gold Coast Schools 1

Transcription

1 Broker Chapter 14 Federal Income Tax Laws Affecting Real Estate Copyright Gold Coast Schools 1

2 Learning Objectives List the 2 principal tax deductions available to homeowners List the 2 types of home loans that qualify for a homeowner's interest deduction Itemize the 5 requirements for deducting buyer-paid points Explain how to use an IRA to contribute to the down payment and acquisition costs of a new home Copyright Gold Coast Schools 2

3 Learning Objectives List the requirements for excluding tax on the gain from the sale of a principal home sold Itemize the steps required to calculate taxable income from an investment property's operations Copyright Gold Coast Schools 3

4 Learning Objectives Describe the process used to allocate a property s acquisition costs between land and improvements Calculate the annual depreciation for both residential income properties and nonresidential income properties List 2 methods for deferring taxes on the disposition of investment property Copyright Gold Coast Schools 4

5 Income Tax Treatment Principal and Second Homes Interest deduction Home acquisition loans Any loan used to buy, build or improve a home Interest on up to $1 million of debt qualifies for the interest deduction Copyright Gold Coast Schools 5

6 Income Tax Treatment Principal and Second Homes Home equity Any loan on a home used for a purpose other then acquisition Interest on up to $ 100,000 of debt qualifies for the interest deduction Home Construction Mortgages Subject to Million dollar ceiling Home Improvement Loan Acquisition debt Subject to $1 Million ceiling Copyright Gold Coast Schools 6

7 Income Tax Treatment Principal and Second Homes Refinanced loans Loan for less or same - no tax effect Buy, build or improve Acquisition debt Subject to million dollar ceiling Home equity debt - $ 100,000 limit Copyright Gold Coast Schools 7

8 Points Points for acquisition or improvement of a personal home are deductible if Residence secures the loan Charges are typical Established business practice to charge points Copyright Gold Coast Schools 8

9 Points Points paid by the seller Deductible by the buyer as interest Must be deducted from the home s cost basis Seller may treat as a selling expense Copyright Gold Coast Schools 9

10 Sale of Principal Residence Capital gains exclusion $250,000 of gain excluded for single filer $500,000 excluded for married couples filing jointly Copyright Gold Coast Schools 10

11 Property Tax Deduction Itemized Deductions Property taxes may be deducted Standard Deductions Given to all taxpayers Itemizing interest and property taxes on an individual s 1040 creates a tax savings to the extent itemizing exceeds the standard deduction Copyright Gold Coast Schools 11

12 Traditional IRA IRA deduction for down payment A first time homebuyer is any person who has not owned a home in the prior 2 years May use up to $10,000 of IRA savings for down payment without having to pay the early withdrawal penalty May use for child, grandchild or ancestor Copyright Gold Coast Schools 12

13 Roth IRA Distributions are tax free if No distributions taken for 5 years after first contribution Taxpayer is age 59 ½ or is disabled, dies or the distribution is taken for first time homebuyer expenses Copyright Gold Coast Schools 13

14 Special Rules Vacation Homes Home Office Prove space is used exclusively and regularly: Meet or deal with customers Principal place of business Copyright Gold Coast Schools 14

15 Tax Incentives for Low-Income Housing Tax credit 100% direct reduction to taxes Approximately 3 times more than tax deduction Tax deduction Multiply personal tax rate times the deduction Result is the tax savings Copyright Gold Coast Schools 15

16 Tax Incentives for Low-Income Housing Tax credit vs. tax deduction Example: $100,000 income Tax rate of 28% $10,000 Tax deduction x 28% = $2,800 savings Tax credit $10,00 tax deduction = $10,000 savings Copyright Gold Coast Schools 16

17 Sale of Principal Residence The Taxpayer Relief Act of 1997 Exclusion of gain Single taxpayer up to $ 250,000 Married filing jointly up to $ 500,000 Copyright Gold Coast Schools 17

18 Sale of Principal Residence To exclude gain taxpayer must Both own and use home as principal residence for 2 of the last 5 years Not have excluded a gain on another home sold during the 2 year period before the current sale Copyright Gold Coast Schools 18

19 Sale of Principal Residence Exception to the 2 year rule when the primary reason for the sale is Change in place of employment Medical reasons Unforeseen circumstances Death Divorce Multiple births same pregnancy Damage from disaster Condemnation Copyright Gold Coast Schools 19

20 Income Tax Treatment After Tax Cash Flow Potential Gross Income PGI (or GI) Vacancy and Collection loss allowance Other Income - V&C + OI (% or $) Effective Gross Income Operating Expenses Net Operating Debt Service Before Tax Cash Flow EGI -OE NOI -DS BTCF Income Taxes After Tax Cash Flow -TX ATCF 20

21 Income Tax Treatment Real Estate Investment Operations Calculating Taxable Income Net Operating Income Reserves Interest Depreciation Taxable Income NOI +RES -INT -DEP TI Copyright Gold Coast Schools 21

22 Reserves and Depreciation Reserves Not deductible for tax purposes Must be added back to NOI Depreciation Total acquisition cost - calculated by adding other costs to acquire a property to the purchase price Depreciable basis - calculated by multiplying the total acquisition cost times the building ratio Copyright Gold Coast Schools 22

23 Income Tax Treatment Real Estate Investment Operations Building ratio = Building value Total Property Value Recovery periods and method Residential property 27.5 years Nonresidential property 39 years The method is straight-line Copyright Gold Coast Schools 23

24 Taxes from Operations Active income - earned Portfolio income - stocks and other similar investments Passive income - real estate i.e. rent Copyright Gold Coast Schools 24

25 Taxes from Operations Active Income Wages Salaries Passive Income Rental Operations Portfolio Income Dividends Interest Copyright Gold Coast Schools 22

26 Passive Losses Active (Material) participant Can deduct passive losses against active income without limitation At least 750 hours and 50% personal services to the real estate industry Copyright Gold Coast Schools 26

27 Tax Classification of Investment Personal residence For sale to customers - least favorable (worst) tax treatment Dealer For use in a trade or business most favorable tax treatment Investment Copyright Gold Coast Schools 27

28 Sale of Investment Real Estate Taxation of gain or loss Short term capital gain Property held for 12 months or less Taxable at the taxpayer s ordinary tax rate Long term capital gain Property held for over 12 months Maximum tax is 15% for taxpayers earning less than $400,000 ($450,000 for joint returns) Maximum tax is 20% for taxpayers making more than $400,000 Tax on depreciation taken over the holding period is 25% Copyright Gold Coast Schools 28

29 Installment Sales Advantages Near retirement seller may be in a lower tax bracket Sale amount spread out over many years Pay taxes each year on payments received Not taxes on one lump sum Owner financing can receive higher interest Copyright Gold Coast Schools 29

30 Like Kind Exchanges Like kind exchanges allows for deferral of realized gain until the owner disposes of the new property Like kind property is investment real property for investment real property Copyright Gold Coast Schools 30

31 Like Kind Exchanges Boot Unlike property Personal property included in the exchange Cash Net mortgage relief Qualified intermediary must handle the exchange Deferred Exchange Copyright Gold Coast Schools 31

32 Methods of Deferring Taxes Upon Disposition (Special Rules) Distribution to heirs the ultimate deferral Copyright Gold Coast Schools 32