reprinted from the First American Title Company Exchange Newsletter!  Remember:  having a strategy for your investment properties, 2nd homes and even re-thinking your primary residence could save you big bucks on the tax front.  Just something to think about…..

Tax Saving Strategies Utilizing 1031 Exchanges

Are we glad that tax season is over for 2012??  Well, really “tax season” is never over!  Tax fairness seems to already be dominant themes in a year with a presidential election in the fall. And, “Fair” is in the eye of the beholder!!  Many different tax proposals have been put forth by various committees and government representatives, but most believe that these proposals stand little chance of being enacted into tax law. Following is a brief overview of several different tax proposals:

Bowles-Simpson Plan: The National Commission on Fiscal Responsibility and Reform released a report identifying ways to lower tax rates and eliminate some tax deductions. Their plan (often referred to as the Bowles-Simpson Plan) failed to get enough votes on December 3, 2011.

The Ryan Plan: The “Path to Prosperity: A Blueprint for American Renewal” is a budget proposal by Representative Paul Ryan, Chairman of the House Budget Committee. The Ryan plan lowers tax rates, eliminates some deductions, and reforms Medicare. It passed the House on April 15, 2012, but has little chance of being passed by the Senate.

The Buffet Rule: This plan (Senate Bill 2230) is named after investor Warren Buffet, and requires everyone making over $1 million a year to pay a minimum effective tax rate of at least thirty percent (30%). The plan’s intent is to raise taxes on the rich and bring more “fairness” to the tax code. It failed to pass the Senate on April 16, 2012.

Interesting story and tax case:  A recent U.S. Tax Court ruling clarified the IRS position that the $1.1 million limit for mortgage interest deduction applies per residence and not per taxpayer as some homeowners were hoping.

A married homeowner filing jointly can have fully deductible interest on a mortgage of up to $1,000,000 of acquisition debt and up to an additional $100,000 of home equity debt. If the married couple files separately, each party is limited to deducting the interest on half of those maximum amounts.

The court case came about when two unmarried individuals who owned a home together as joint tenants felt that they were entitled to deduct the interest on $1.1 million of debt each. IRS did not agree with their understanding and neither did the Tax Court. The Court ruled that the limits apply per residence, not per taxpayer even if a home is co-owned by unmarried taxpayers.  I guess you can’t blame them for trying!!!???

The result for the taxpayers in this case was that their deduction was cut in half resulting in much more income tax due. While this situation only affects a few taxpayers, obviously, have a conversation with your tax professional prior to “trying this at home”!!!  Not really an issue for me  ….  too bad!  ;-)

The Mortgage Forgiveness Relief Act of 2007 was passed by Congress to avoid additional financial hardship that some homeowners might experience due to a foreclosure or short sale. The law affects mortgage relief that occurs from January 1, 2007 to December 31, 2012.
The forgiveness is only applicable to taxpayers’ principal residence and only acquisition debt used to buy, build or improve the home. The additional cash taken out when refinancing a home will not be eligible for the relief unless it is used for capital improvements.Normally, IRS considers partial or total debt forgiven by a lender to be treated as ordinary income. This not only affects foreclosures but even short sales where only part of the debt is forgiven would trigger additional taxes for the homeowner. There are exceptions that apply such as bankruptcy and insolvency.

The lender is required to submit a 1099 form to IRS and provide the homeowner a copy who will file the forgiven amount on Form 982 as part of their 1040 tax return. How this affects your individual situation may differ due to other circumstances and advice from a tax professional is recommended.

Deductible Is the Point :-)

To continue our week of blogs about real estate tax deductions…I wanted to “point out” that the term “points” refer to prepaid interest on a home mortgage and can be fully deductible by the buyer in the year paid if the right conditions exist. The points must be used to buy, build or improve a taxpayer’s principal residence but not all fees charged by the lender are necessarily deductible.

According to IRS Publication 936, “The term ‘points’ is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. A borrower is treated as paying any points that a home seller pays for the borrower’s mortgage.”

If you purchased a home in 2011, have your tax professional evaluate your closing statement or FINAL HUD (which you were given when you signed papers to close on your loan, so your Realtor or title rep should also be able to secure for you).  You are looking to see if there are loan fees that may be used as a deduction on your tax return regardless of whether you or the seller paid them.

Refinancing a principal residence or purchasing an investment or income property require that points must be deducted over the term of the mortgage rather than deducting them fully in the year paid.  Borrowers in these situations should consider the benefits of lower interest rates from paying points vs. higher interest rates without points.  You should consider how long you think you will own the property to do the math.

Be sure and speak with your tax professional about your specific situation!

Choose Your BEST Deduction!

Once again it’s almost tax time (sorry…didn’t mean to bring you down) and we continue “Tax Week” on the Fabulous Portland Blog.  On Monday I posted a long list of documentation you might need to prepare your taxes.  However, some other “stuff” to consider:  one third of all U.S. households, 75% of households with more than $75,000 income and most homeowners itemize their deduction on their federal income tax returns (according to the IRS). Of course, this (usually) makes sense because the interest paid on their mortgage and their property taxes probably exceeds the allowable standard deduction.  However, with interest rates as low as they have been in the last two years it is possible that the standard deduction may be the better choice for some.

Each year, any taxpayer can compare the total of the itemized deductions to the standard deduction to select which method will result in the most benefits. The 2011 standard deduction is $11,600 for married couple filing jointly and $5,800 for single filers.

The Housing and Economic Recovery Act of 2008 allows homeowners to take “the standard deduction and the lesser of their actual property taxes or $1,000 if filing their return married jointly”. For more information, see Schedule L  found on www.IRS.gov and consult your tax advisor.

Here’s a great article about enjoying what tax deductions we currently have while we can!!

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!