Information and supporting documentation used to prepare tax returns

• Copies of all compensation and pension distribution reports – W-2(‘s), 1099(‘s), etc.
• Form(s) SSA 1099 (Social Security benefits)
• Form(s) 1099 (interest, dividends, etc.)
• Schedule(s) K-1 (income/loss from partnerships, S corporations, etc.)
• Form(s) 1098 (mortgage interest), property tax statements and property tax receipts
• Brokerage From(s) 1099-B from stock, bond or other investment transactions
• Closing statements pertaining to real estate transactions, including refinancing
• Form(s) 1098-E for student loan interest, Form(s) 1098-T for tuition payments
• All information regarding educational expenses and fees, scholarships, etc.
• All other relevant supporting documents (schedules, checkbook registers, etc.)
• Any tax notices received from the IRS or other taxing authorities

For small businesses some records include:

• Checking account and bank statement information. Computerized bookkeeping of your business accounts is recommended. Records of all income sources. This should be totaled and accounted for monthly (and in some cases daily and weekly) with appropriate backup documentation. With TAX Organizer your information should easily be merged with all your other data.
• Records of all expenses. Disbursements showing all payments made should be meticulously saved. This includes all check, cash and credit card disbursements. All invoices, bills and receipts related to this should be maintained as part of the record keeping. Purchase of assets such as vehicles, equipment and real estate used for business may require special depreciation analysis.
• Employee compensation and tax records. This can get complex so it is important to evaluate this regularly and keep current. Our firm can assist in setting up a proper system for maintaining payroll records.

Sale by Surviving Spouse

The IRS has given special consideration regarding the sale of their jointly-owned principal residence after the death of a spouse. If the surviving spouse does not remarry prior to the sale of the home, they may qualify to exclude up to $500,000 of gain instead of the $250,000 exclusion for single people.

• The sale needs to take place after 2008 and no more than two years after the date of death of the spouse
• Surviving spouse must not have remarried
• Both spouses must have used the home as their principal residences for two of the last five years prior to the death
• Both spouses must have owned the home for two of the last five years prior to the death
• Neither spouse may have excluded gain from the sale of another principal residence during the last two years prior to the death

If you have been widowed in the last two years and have gain in your principal residence, it would be worth investigating the possibilities. Contact your tax professional for advice about your specific situation. Contact me to find out what your home is worth in today’s market. See IRS Publication 523 – surviving spouse.

Keep Track of Improvements

People are staying longer in their homes according to the National Association of Realtors and the U.S. Census.  Over time, even a modest appreciation could result in a significant gain and homeowners should have a strategy to minimize possible taxes.

Maintenance on a principal residence is not deductible but improvements can add to the basis which can reduce the gain in the eventual sale.  Improvements are easily identified if they add to the value of a home, prolong its useful life or adapt it to new uses.

Receipts and other proof, such as pictures, should be kept during ownership and for several years after the sale of the home.  They can include the closing statements from the purchase and sale of the home and all receipts for improvements, additions or other items that affect the home’s adjusted basis or cost.

For a principal residence, basis includes the price paid plus certain acquisition costs and capital improvements made. When the property is sold for more than the basis, there is a gain.  Currently, homeowners that meet the requirements can exclude up to $250,000 of gain if single or up to $500,000 if married filing jointly.

A simple strategy is to put documents that affect the basis of the home in one envelope.  Thus, any receipt for money spent on the home that isn’t the house payment or utilities goes into the envelope.  Your tax advisor will be able to help you sort through them to determine the capital improvements.

For more information on determining basis or capital improvements, see IRS publication 523, Selling Your Home.

It’s obviously going to be a Herculean task for Congress to balance the budget and reduce the deficit. It’s sort of like the country song lyric that goes “everyone wants to go to Heaven but nobody wants to go now.” It is estimated that the mortgage interest deduction cost the government $100 Billion last year which is why it is a target for cuts.

The Mortgage Interest Deduction has been part of Income Tax laws in this country since 1913. The United States of America is one of the few countries in the world that allows such a deduction. Our goverment has always supported homeownership as is evidenced in the different tax benefits it receives:

• Mortgage interest deduction up to $1,000,000 in acquisition debt on a principal residence and second home
• Deduction of interest on Home Equity debt of $100,000 over acquisition debt used for any purpose
• Capital gain exclusion on up to $500,000 for married couples filing jointly and $250,000 for single homeowners
• Favorable long-term capital gain rates if gain exceeds exclusion limits
• Property tax deduction

There is an interesting relationship between a good economy and a healthy housing market. Contrasted to profits from the stock market which tend to be plowed back into other investments, profits from home sales tend to be spent on consumer products that directly benefit the economy.

The National Association of REALTORS supports the MID (Mortgage Interest Deduction) and reports that one job is created for every two homes sold. It further states that $60,000 is pumped into the economy for each home sold and that homeownership accounts for over $2 Trillion of the U.S. gross domestic product.  Now, I can’t personally back up those numbers, but I do know that home owners contribute in taxes paid, consumer spending and consumer confidence!

American homeowers are currently paying 80-90% of all federal income tax collected. Some economists believe that a healthy housing market is a leading indicator for economic recovery and that tampering with a significant homeowner benefit like the mortgage interest deduction would hurt the economy!

I continually write (or is it whine) about the constant changes and new restraints regarding real estate mortgages.  It seems that banks don’t REALLY want to lend money?  I know this is whiplash from the years of unrestrained lending practices, but they are often punishing the wrong people.  I also constantly mention that real estate can be a great addition to any financial portfolio!  It’s all about diversification!!

There are new rules and guidelines from Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) for financing investment real estate.  If you feel you are ready or want to prepare to add real estate to your overall financial strategy, it’s worth brainstorming with a real estate, mortgage and tax professional to get your “ducks in a row”!  Some of the new guidelines include:

• minimum 20% down (better interest rate with 25% down)
• No gift funds can be used
• the seller can pay up to 2% towards closing costs
• the borrower can have no more than 4 mortgages total (including your primary residence).  5-10 investment properties have additional rules)
• must have 6 months PITI (principal, interest, taxes, insurance) for the subject property plus 2 months PITI reserves on all other properties
• if the buyer has no history of property management covering two years, must qualify for full PITI regardless of expected rental income
• there is NO loan program for investment property purchases under FHA and VA (though you can do an FHA streamline refinance on a rental with a current FHA loan)

If this is your first rental purchase, there are certain special requirements.  Be sure and document all cash for the down payment and reserves.  You must qualify for the purchase with no allowed rental income.  Rent loss insurance is required.  One of the hottest programs is homepath.com where you can put 10% down with no mortgage insurance and no appraisal required.  Lenders offer the loan and Fannie Mae backs the terms.

What if you already have 4 mortgages or more?  Fannie Mae has a program for financing up to 10 mortgages but few lenders participate and their individual terms can vary and those lenders may add their own restrictions.  You could consider refinancing your primary home or other investment properties to pull cash out to purchase new properties.  I attended a class where the mortgage broker then “apportioned” a percentage of the loan amount used for the rental on the schedule E and the remainder on your primary home.  You would definitely want to discuss with your tax professional to confirm.  Obviously, any refinancing would be for the seasoned investor who had meticulously “run the numbers” for their personal financial situation!

The absolute beauty of holding real estate as part of a financial strategy is that you purchase the property leveraged with other people’s money, the tenant makes the PITI payment, you pocket the cash flow, you enjoy the tax incentives.  As time goes by, your equity has increased through the tenants paying down the principal, rents generally increase thus increasing your passive income.  Then you either allow the rental income to supplement your regular or retirement income OR you sell with your initial investment increased both by increased equity and whatever natural appreciation may have happened in your marketplace!

You hear the term ”Cash is King” thrown around these days.  Having a certain amount of liquidity with your savings, mutual funds, money markets, etc is one example.  Paying cash for real estate is another case in point.  Sometimes a cash offer will most certainly prevail in a real estate situation with multiple offers.  The sellers don’t have to worry about stumbling blocks such as low appraisals or last minute credit glitches with the borrowers’ loan or the appraiser insisting on repairs after the property inspection has already been negotiated.  These are rare occurrences, but when they happen they can unravel a real estate transaction!  Cash will usually be preferred in a short-sale situation or bank-owned property for obvious reasons.  They have already repossessed the home once and want to be rid of it!!

So, you might think that a person who pays cash doesn’t have many concerns.  Somewhere around 9% of people paid cash for their home last year with a considerably higher percentage paying cash this year.

Are there any downsides to paying cash???  On the surface, paying cash certainly seems simple but it may have consequences later.  Paying cash may affect your ability to deduct the interest on a mortgage placed on the home at a later date.  So, you need to decide if you might put a loan on the home in the future.  Currently, a homeowner may deduct the interest on up to $1 million of acquisition debt.  Paying cash for a home establishes acquisition debt a $0.  At that point, the only deductible interest would be home equity debt which is limited to $100,000 over acquisition debt.  You can get more information abut this from IRS Publication 936.

There is also the benefit of leveraging or using other people’s money to strengthen the return on an investment property.  It’s worth taking a moment to discuss the pros and cons with a financial consultant, tax adviser and/or both!

For those who moved in 2010, you may find tax deductions to write-off some of those hefty moving expenses. You can write off relocation costs on your taxes, as long as the move is work-related, according to the IRS. Some IRS-approved deductions for moving include the costs to move household goods and personal property, limited storage and insurance fees, and utility connection or disconnection charges. The IRS also allows for some deductions with lodging and travel expenses near your new and former homes, as well as shipping costs for your car and even the travel arrangements for your pets. Here are some tips for claiming moving-related tax deductions:

• Use the long Form 1040 to claim moving costs. Use Form 3903 to figure the costs. You do not have to meet a percentage-of-income threshold for moving deductions.
• Ensure you meet the distance test. The location of your new job must be at least 50 miles farther from your prior address than your last office was. For example, if you lived 10 miles from your old job, your new job must be at least 60 miles from your old home before you can deduct moving costs. The IRSs distance test only considers the location of your old home and how far it is from your previous job, not your new residence.
• Check the time requirements. Moving expenses are deductible if they were incurred within one year of starting a new job. You also have to work full time at a new job for at least 39 weeks during the first 12 months. As for self-employed workers, they must meet the year-to-move deadline and work full time at their entrepreneurial enterprise for 78 weeks during the first 24 months.
• Collect all of those moving receipts. To claim the deductions, make sure you have receipts such as for the costs to move your property, storage, or utility connections. Source: BankRate.com

Of course, always check with your CPA or tax professional regarding your tax strategies!!!

In recent weeks, many proposals suggesting a variety of changes to the tax system have been discussed.  One has been elimination of our mortgage tax deduction.   If the mortgage interest and real estate tax deductions were eliminated, the loss would not be a one-year event.  Homeowners would lose out on benefits each and every year.  The present value of these lost savings could total $3.2 trillion.  The value of all owner-occupied real estate in the United Sates in 2009 was $19.3 trillion (will be updated for 2010).  NAR (National Association of Realtors) believes that if the lost tax savings are fully capitalized into the price of homes, the average decline in value would be 17%.  For the typical homeowner, this could mean a loss in value of $29,500*.  Here are some mortgage interest deduction facts*:

Mortgage Interest Deduction Facts:

• 50 million/68% of the approximately 75 million owner-occupied houses in the US in 2009 had a mortgage.
• 38.5 million taxpayers claimed a deduction for mortgage interest (MID) in 2008.
• The average taxpayer claiming the MID deducted $12,200 from taxable income in 2008.
• The average taxpayer saved $3,050 in taxes by claiming the MID.

Real Estate Tax Deduction Facts:

• 42 million taxpayers in the US claimed a deduction for real estate taxes in 2008
• The average taxpayer claiming the real estate deduction subtracted $4,090 from taxable income in 2008
• Therefore, the average taxpayer saved $1,020 in taxes as a result of the real estate tax deduction.
• The total savings from the real estate tax deduction in the US in 2008 was $43 billion.

*all figures from realtor.org

IRS Tips About Rental Income and Expenses 

Do you rent property to others? And, if you follow my ramblings, you know I absolutely love the idea of someone else buying my real estate for me!!  If you have investment properties , you’ll want to read the following seven tips from the IRS about rental income and expenses.

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use of or occupation of property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them.  Publication 527, Residential Rental Property, includes information on the expenses you can deduct if you rent property.

1. When to report income. You generally must report rental income on your tax return in the year that you actually receive it.
2. Advance rent. Advance rent is any amount you receive before the period that it covers.  Include advance rent in your rental income in the year you receive it, regardless of the period covered.
3. Security deposits. Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
4. Property or services in lieu of rent.  If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.  If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.
5. Expenses paid by tenant. If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses. See Rental Expenses in Publication 527, for more information.
6. Rental expenses.  Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income.
7. Personal use of vacation home. If you have any personal use of a vacation home or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use.  If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses.

For more information on rental income and expenses see Publication 527. This publication can be downloaded from http://www.irs.gov or ordered by calling 800-TAX-FORM (800-829-3676).

Buy low and sell high is a basic tenet of investing and there are some outstanding opportunities available at this time.  As a Residential Finance Consultant, I’d like to invite you to a FREE webinar “Rental Property Opportunities” presented by national speaker, Pat Zaby.

It will be on Tuesday evening, April 5, 2001 at 7:00 PM CDT (8:00 PM EDT; 6:00 PM MDT; 5:00 PM PDT).  You need to register using the link below.

If you have any questions, please let me know.  I’ve heard this presentation and think you’ll find it interesting.