Real Estate Tax Secrets of the Rich is the title of another new book that some of you may want to purchase. The author is Sandy Botkin, CPA, 2007, McGraw-Hill, New York, 226 pages. I paid Amazon.com $16.47 for my paperback version. Considering the rather boring topic of taxes, the book is very easy to read with simple explanations and numerous drawings and cartoons. The chapters are short with summaries at the end. Also at the end of each chapter are citations to recent IRS rulings and tax court decisions. An Appendix at the end of the book provides various resources, most of them online. The book contains both basic and advanced tax explanations on virtually every tax topic applicable to homeowners and investors. The author has an excellent sense of humor making his book a reasonably easy, enjoyable read. The remainder of this section provides applicable information.
1. Improvements versus Repairs: Improvements made to personal residences and second homes increase your tax basis as well as adding value to the home. Repairs made to personal residences and second homes are considered personal expenses and are not added to basis. However, if you make what would normally be a repair become part of a general plan of improvements, the IRS has ruled that the whole expenditure can then be an improvement. For rental properties, it’s just the opposite; you are better off classifying fix-up expenses as repairs because repairs are deductible when they are incurred. The book discusses the difference between repairs and improvements in two separate chapters, one oriented towards personal residences and the other towards rental properties.
2. Excluding Gain When Selling Your Home: Several chapters deal with the $250,000 or $500,000 (single or married) maximum exclusion when you sell your own home and have occupied it for two out of the past five years. I found it interesting that a surviving spouse can wait for up to two years after the year of death to file for the full $500,000 exclusion if the surviving spouse maintains a household for dependent children. If there are no dependent children, the surviving spouse can claim the full $500,000 exclusion only in the taxable year of death. Taxable depreciation recapture is discussed on pages 1 and 7 of this newsletter.
A partial exclusion is authorized if ownership was less than two years and a move is/was for health or job purposes; this occasionally applies to owners that are either moving to or have moved from Hawaii to the Mainland. If the home ownership was only for 12 months and the owner is single, the maximum exclusion would be 12/24 times $250,000 or $125,000.
There was an entire chapter dealing with selling a former home to your own Chapter S Corporation if you rent the property and are about to lose the two out of five years of occupancy. By selling the home to your own Chapter S Corporation, you could claim the $250,000/$500,000 exclusion in the sale and then continue to operate the home as a rental through your own Chapter S Corporation.
3. Tax Splitting: There were several chapters that discussed minimizing taxes by splitting income/ownership among family members. Several examples were provided ranging from relatively simple techniques such as transferring rental property to children that are then taxed at their lower tax rates vice the higher tax rate of the parents. More complicated techniques involved buying rental property and having children own title to the land with the parents owning the building. The parents then rent the land from their children while depreciating the building. Another technique is to depreciate equipment used in investment property (washers, dryers, ranges, etc.) and then give title to the equipment to lower tax-rate children. The parents then lease the equipment back, paying monthly rent; i.e., first you depreciate the equipment and then you lease it or, in effect, you deduct the equipment twice.
There were more complex examples involving the sale and leaseback of a personal residence through a note to children that would cover their payments via rent from the parents. The home then becomes investment property with deductible repairs. Moreover, the children can visit their property (and their parents) via deductible caretaking trips. I encourage anyone considering a sale and leaseback of a personal residence to discuss the potential consequences of not having actual title to the property with a real estate attorney.
4. Seller Financing: A relatively long chapter discussed Seller Financing and how seller take-backs can create more wealth than selling for cash. I found this to be one of the more interesting sections of the book; however, it may not be too practical now with the relatively low mortgage rates that continue to exist.
5. Miscellaneous: Other chapters covered what you can claim or deduct while searching for investment property; hiring family members; maximizing your deductions when building a home; understanding depreciation; the pro’s and con’s of selling a home to an ex pursuant to a divorce decree; using 1031 exchanges and installment sales to reduce taxes; IRS record keeping requirements; minimizing passive loss problems; how to calculate gain or loss; understanding vacation home and second home rules; a whole chapter covering frequently asked questions; and another chapter on using today’s technology, primarily the Internet.
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Real Estate Tax Secrets of the Rich
2. Excluding Gain When Selling Your Home: Several chapters deal with the $250,000 or $500,000 (single or married) maximum exclusion when you sell your own home and have occupied it for two out of the past five years. I found it interesting that a surviving spouse can wait for up to two years after the year of death to file for the full $500,000 exclusion if the surviving spouse maintains a household for dependent children. If there are no dependent children, the surviving spouse can claim the full $500,000 exclusion only in the taxable year of death. Taxable depreciation recapture is discussed on pages 1 and 7 of this newsletter.
A partial exclusion is authorized if ownership was less than two years and a move is/was for health or job purposes; this occasionally applies to owners that are either moving to or have moved from Hawaii to the Mainland. If the home ownership was only for 12 months and the owner is single, the maximum exclusion would be 12/24 times $250,000 or $125,000.
There was an entire chapter dealing with selling a former home to your own Chapter S Corporation if you rent the property and are about to lose the two out of five years of occupancy. By selling the home to your own Chapter S Corporation, you could claim the $250,000/$500,000 exclusion in the sale and then continue to operate the home as a rental through your own Chapter S Corporation.
3. Tax Splitting: There were several chapters that discussed minimizing taxes by splitting income/ownership among family members. Several examples were provided ranging from relatively simple techniques such as transferring rental property to children that are then taxed at their lower tax rates vice the higher tax rate of the parents. More complicated techniques involved buying rental property and having children own title to the land with the parents owning the building. The parents then rent the land from their children while depreciating the building. Another technique is to depreciate equipment used in investment property (washers, dryers, ranges, etc.) and then give title to the equipment to lower tax-rate children. The parents then lease the equipment back, paying monthly rent; i.e., first you depreciate the equipment and then you lease it or, in effect, you deduct the equipment twice.
There were more complex examples involving the sale and leaseback of a personal residence through a note to children that would cover their payments via rent from the parents. The home then becomes investment property with deductible repairs. Moreover, the children can visit their property (and their parents) via deductible caretaking trips. I encourage anyone considering a sale and leaseback of a personal residence to discuss the potential consequences of not having actual title to the property with a real estate attorney.
4. Seller Financing: A relatively long chapter discussed Seller Financing and how seller take-backs can create more wealth than selling for cash. I found this to be one of the more interesting sections of the book; however, it may not be too practical now with the relatively low mortgage rates that continue to exist.
5. Miscellaneous: Other chapters covered what you can claim or deduct while searching for investment property; hiring family members; maximizing your deductions when building a home; understanding depreciation; the pro’s and con’s of selling a home to an ex pursuant to a divorce decree; using 1031 exchanges and installment sales to reduce taxes; IRS record keeping requirements; minimizing passive loss problems; how to calculate gain or loss; understanding vacation home and second home rules; a whole chapter covering frequently asked questions; and another chapter on using today’s technology, primarily the Internet.
Back to Useful Newsletter Articles