Florida Real Estate Brokers Guide Sixth Edition Linda
Florida Real Estate Broker’s Guide, Sixth Edition Linda L. Crawford Edward J. O’Donnell Copyright © 2017 Kaplan, Inc. All rights reserved.
Unit 14 Federal Income Tax Laws Affecting Real Estate
Interest Deductions • Home acquisition loans – Residence can be house, condo, mobile home, motor home, or yacht if it has basic living needs – Interest can be deducted for up to $1 million in debt – The mortgage must be recorded • Home equity loans © 2017 Kaplan, Inc. 3
Interest Deductions • Home construction loans – From time of construction for 24 months • Refinanced loans – From time of construction for 24 months 4 © 2017 Kaplan, Inc.
Points • One point equals one percent of the loan • Points are deductible in the year paid if: – It’s a personal residence – Points don’t exceed the typical charges for area • Points paid by the seller are deductible by the buyer as interest • Points paid to refinance must be capitalized, then amortized over the life of the loan © 2017 Kaplan, Inc. 5
Homeowner Deductions A homeowner can deduct • Interest • Ad valorem taxes Or, the owner can take the standard deduction – For interest and tax deductions to offer savings, the total itemized deductions must be greater than the standard deduction 6 © 2017 Kaplan, Inc.
IRA for Use as Down Payment • A “first-time” home buyer can use up to $10, 000 of an IRA account as a down payment. – “First-time” means no ownership of a home for previous two years 7 © 2017 Kaplan, Inc.
Vacation Homes • Property rented for less than 15 days/year – Rental income not reported – All normal deductions apply for owner • Property rented for 15 days/year or more AND personal use days are less than 14: – Same tax treatment as investment property • Property rented for 15 days/year or more AND more than 10% of the days rented: – Expenses can be deducted to extent of income © 2017 Kaplan, Inc. 8
Office in Home • Only deductible if – Area in home is used exclusively for business – No other fixed location exists where taxpayer carried out administrative work • Usually sales associates don’t qualify 9 © 2017 Kaplan, Inc.
Sale of Principal Residence • If a taxpayer uses the home as principal residence for two of past five years: – A single filer can exclude tax on up to $250, 000 of gain on the sale – A married couple, filing jointly can exclude tax on up to $500, 000 of gain on the sale 10 © 2017 Kaplan, Inc.
Tax Treatment for Investment Property • To calculate taxable income, start with NOI +Reserves for Replacement - Interest - Depreciation - Amortization of loan costs =Taxable income © 2017 Kaplan, Inc. 11
Calculating Depreciation • Add all costs of acquisition • Allocate between land improvements – Only improvements can be depreciated – Can use a percentage, such as that used by the property appraiser • Divide the depreciable basis by # of years – 27. 5 years for residential property – 39 years for non-residential property © 2017 Kaplan, Inc. 12
Passive vs. Nonpassive Income • Passive income – Rental income is automatically passive – losses cannot be deducted from nonpassive income – “Active participants” can deduct up to $25, 000 of passive losses against nonpassive income • Nonpassive income – Real estate professionals can deduct all operating losses from other income © 2017 Kaplan, Inc. 13
Tax Classification of Investment • Personal residence – Interest and taxes are deductible – Taxes on gain on sales may be excluded • For sale to customers – Cannot deduct depreciation – Can’t use capital gains tax rates 14 © 2017 Kaplan, Inc.
Tax Classification of Investment (cont’d) • Trade or business – Best tax treatment – Operating losses deductible against other income – Capital gains may be deferred by installment sale • Investment – Passive investment which limits deductible losses – May deduct depreciation, but must recapture at sale – Capital gains treatment have lower tax rates © 2017 Kaplan, Inc. 15
Taxation of Gain or Loss on Investments • Two types of capital gain treatment – Short term gain if property was held for one year or less. Gain is taxed at taxpayer’s rate – Long Term gain if property held for more than one year. Maximum tax rate is • 15% for taxpayers earning less than $400, 000 ($450, 000 for joint filers) • 20% for taxpayers earning more than those amounts • Capital loss – an investor can deduct a maximum of $3, 000 annually © 2017 Kaplan, Inc. 16
Installment Sales • Installment sale of reporting gain is automatic for the seller who finances the sale • The seller may elect to pay taxes on the entire gain in the year of sale • Any depreciation taken must be recaptured in the year of sale • Losses may not be deferred 17 © 2017 Kaplan, Inc.
Like-Kind Exchanges • Real estate held for investment or used in a business may be exchanged for like-kind property • Realized gain may be deferred until the sale of the new property • The like-kind exchange is the method of choice for investors because it avoids taxes – Section 1031 allows traders to set up a deferred exchange for properties not yet available 18 © 2017 Kaplan, Inc.
The End 19 © 2017 Kaplan, Inc.
- Slides: 19