Utah Home Mortgage Specialist

 A 1031 exchange may allow investors to defer all capital gains taxes.

With a 1031 transaction, investment property is exchanged for “like” real estate. The basic requirements are that within 45 days after the “relinquished” property has been sold, a “replacement” property must be identified. The identified replacement property must then be acquired within 180 days after the sale of the relinquished property.

What’s important about a 1031 exchange is that the capital gains tax on the relinquished property is deferred — but it does not disappear. What really happens is that the basis for the new property (the “replacement property”) is reduced by the adjusted value of the “relinquished property” (the old property).

A 1031 exchange is complex and requires the services of a “qualified intermediary.” Among other tasks, a qualified intermediary holds the money from the sale of the relinquished property and applies it to the purchase of the replacement real estate. This must be done because under the rules for 1031 exchanges, the seller of a relinquished property cannot touch money from the sale — it must be held by the qualified intermediary.

Accounting for a 1031 exchange is also complex. Essentially there is a need to figure out the sale value of the relinquished property, add back depreciation and account for financing. I would like to offer you a free guide that talks in more detail about 1031 exchanges that’s well worth reviewing before meeting with a tax pro.  Email me at collette.mckee@academy.cc and I’ll send it to you a copy immediately.

Investment real estate can generate substantial write-offs.

If you own rental property you must seek a fair market rental for your property. You may generally deduct mortgage interest, property taxes, repair costs, management by an outside party, depreciation, advertising, insurance, utilities, legal services and other expenses.

It’s possible with rental properties to have both a positive cashflow and a loss for tax purposes. However, the ability to use real estate losses to reduce overall taxes may be phased out as adjusted gross income rises above $100,000.

If a rental involves relatives special rules and restrictions may apply. Check with a tax pro for details.  However right now is a great time to purchase investment property.  With values near or at the lowest value we have seen in years if you have a desire to own income property now may be the time to jump in.  One thing to be aware of is that the loans offered for investment properties require 25% – 30% down payment and typically care a slightly higher interest rate.

If you would like to know more about qualifing and purchasing an investment property give me a call.

Home offices may be deductible.

If a portion of your home is used regularly and exclusively as your principal place of business or for the convenience of your employer it may be possible to write off a portion of such costs as mortgage interest, property taxes and utilities. There are a number of tests which must be met to take this deduction, see IRS Publication 587, Business Use of Your Home for details.

In some cases there may be tax advantages associated with not deducting your home office in the year or two before you move. Speak with a tax professional for specifics.

Points may be deducible by both buyers and sellers.

Picture a situation where a home is sold for $500,000 and the owner — to help close the sale — offers to pay 1 point for the buyer. If the property was financed with a $350,000 mortgage, a point would be worth $3,500. According to the IRS, “the seller cannot deduct these fees as interest. But they are a selling expense that reduces the amount realized by the seller.”

Interestingly, in this situation the buyer can also deduct the points when the home is sold.

“The buyer,” says the IRS, “reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them.”

In effect, the seller gets to write-off the $3,500 cost by reducing any profit from the sale. The buyer essentially lowers the purchase price of the property when the home is sold at some point in the future — thus increasing the size of any profit. However, since up to $500,000 in sale profits may be untaxed, most buyers will effectively never pay a tax on the seller’s contribution for points.

Points may be deducible when home is refinanced

If a primary residence is refinanced then the deal with points is different: The expense of a point must deducted over the life of the loan. If the home is sold before the loan term ends, then any undeducted cost for points can be used to reduce owner’s profit from the sale.

If you have purchased a home and have less than 20% equity in the property chances are you are required to pay for private mortgage insurance in conjunction with your regular home mortgage principle and interest payment.

Before you start thinking to yourself about all the drawback to paying for private mortgage insurance.  This column is not going to focus on the pros or cons. We are are just going to focus on the tax advantages if you find yourself with a mortgage that requires PMI.

The following information was taken directly from the IRS’s website:

In general, if you itemize deductions, you may deduct premiums paid for mortgage insurance provided by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), the Rural Housing Service (Rural Housing), or private mortgage insurers in connection with a mortgage for the purchase of your main home. The amount you may deduct is limited if your adjusted gross income is more than $100,000 ($50,000 if married filing separately). No deduction is allowed if your adjusted gross income is more than $109,000 ($54,500 if married filing separately). See the instructions and worksheet for Schedule A, Line 13, to figure your deduction.

Box 4 of Form 1098 may show the total amount of premiums received from you in 2008. If you paid a lump-sum premium that pays for insurance for 2008 and later years, in most cases you must figure your deduction based only on the portion of the premium that pays for insurance for 2008. See Question 2 below if you paid a lump-sum premium that also covers years after 2008.

If you paid a lump-sum premium for insurance provided by FHA or a private mortgage insurer that also covers years after you purchased your home, you must determine the portion of the premium that pays for insurance for this tax year by dividing the total premium by the stated term (number of months) of your mortgage, or 84 months, whichever is shorter. Multiply that amount by the number of months during the tax year that your home was covered by the mortgage insurance. Enter the amount allocated to this tax year in the worksheet for Schedule A, Line 13, to figure your deduction for this tax year. You figure your deduction in later years based on the amounts allocated to those years. If your mortgage is satisfied before the end of your allocation period, you cannot deduct the amounts that are allocated to periods after the mortgage is satisfied.
If you paid a lump-sum premium for insurance provided by VA or Rural Housing, commonly known as a funding fee and guaranty fee respectively, no allocation is necessary, and you figure your deduction for this tax year based on the full amount of the payment. Enter the full amount in the worksheet for Schedule A, Line 13, to figure your deduction.

Make sure you check with a tax provider or CPA as to how this information applies directly to you.