Are you looking for some of the best real estate tax tips? Well, you have come to the right place. These strategies will help you save money.
One of life’s constants is taxes. Unfortunately, we all have to pay our fair share. However, wise people will try to minimize their tax burden as much as possible.
By a show of hands, who wants to pay more taxes? I didn’t think so! Below are some of the best real estate tax tips to help you save money!
It’s always good to look for ways to save money on taxes. As a Hopkinton Real Estate agent, I know these tax topics have come up numerous times over the last thirty-eight years.
I have always enjoyed providing my clients with guidance. I’ve been interested in financial topics since I was young, and spreading my knowledge is rewarding.
Anytime you can help someone reach their goals, it’s a great feeling.
Take a look at the advice for the following Real Estate tax topics I will discuss:
- How do you handle your taxes when getting a divorce?
- What are the tax advantages of owning a home?
- How do real estate capital gains taxes work?
- How do you lower your real estate tax bill when it seems too high?
- What are the tax deductions when purchasing a home?
- What are tax credits I can utilize?
- How do you use a 1031 tax exchange to save on taxes?
From being in real estate for the past three decades, I know there are tax savings many don’t know or forget about. Not taking advantage of these tax strategies can cause significant financial loses. The better educated you are, the more you can potentially save.
Let’s examine what you should know to avoid making that mistake. You can use these top real estate tax tips to make sound financial decisions.
Tax Tips For Divorcing Homeowners
The tax implications are one of the most important economic considerations when getting divorced and owning a home.
There are several ways you can handle the ownership of your home, each with different tax consequences.
One spouse can buy the other out as long as you can both agree on a fair price and one or the other can afford the total cost of the mortgage. You could also sell the house and split the proceeds, each earning up to $250,000 tax-free.
Another option is for one spouse to remain home to raise your children and then sell it. To still get the tax benefits of ownership, you will need an attorney to document that the home is still your primary residence for tax purposes.
This will become part of the process of dividing assets in a divorce. If you and your spouse can handle the emotional stress, you and your spouse could also share the house.
If you and your spouse own rental properties, you should consult your accountant to decide how best to manage your investments during divorce. Selling a vacation home is similar; you should consult an accountant and attorney to understand your tax options.
Knowing the best tax advice for divorcing couples is vital for these reasons. Look at some of the most important considerations regarding taxes and divorce. One of the real estate tax tips you should take to heart is how each option will impact you financially.
Tax Benefits That Come From Owning A Home
In most instances, owning a home can net you thousands of dollars in tax deductions.
Here is a complete summary of the tax benefits of homeownership. Some of these deductions include the capital gains deduction, which allows you to earn up to $250,000 on your own or $500,000 as a married couple, tax-free, from selling your home.
Mortgage interest can also be deducted, up to $1 million worth. Discount points – which lower your interest rate on your loan – are also tax-deductible.
You can also deduct property taxes, which, depending on your area, can amount to thousands of dollars a year.
If you have mortgage insurance, you can also deduct the insurance cost from your tax bill.
Some home improvements can add value to your final sale price, which carries additional tax benefits.
Home equity loan interest can be deducted at the end of the year, as can your home office if you have one.
Remember that the home office deduction tends to get audited, so you should conduct business from home.
Real Estate Capital Gains And Your Home
The real estate capital gains tax law is one of the best tax breaks available to the average person when selling a house.
Capital gains when selling a house are often non-existent because of the current tax breaks.
The current laws allow you to make up to $250,000 in profits from your home sale before you have to pay taxes.
If married, you can make up to $500,000 before taxes are owed. Anything made over the limit is then taxed at 20%. So, if you were to buy a home at $500,000 and then sell it for $800,000 after living there for a while, you would make $300,000.
You will get the $300,000 profit-free and clear if you are married.
You must meet the requirements for the tax gains, including having the home you sell as your primary residence, not a vacation or rental home. It’s also essential to be careful if your spouse has used the exclusion in the past two years—for example, selling a house before marrying you.
It takes two years to use the exclusion again, so you may want to wait to sell the home. However, there are some caveats, like if you are in the military or if your spouse passes away.
Look at the article for all the other real estate capital gains tax law rules! You are guaranteed to find some excellent tax advice you were unaware of.
How To Challenge High Property Taxes
One of the better ways to save on real estate taxes is to appeal to your local assessor when you feel you’re being taxed inappropriately.
Some people miss out on this tax strategy because they don’t believe their city or town will change their assessment.
That is not true. Several of my clients have reduced their property taxes.
While taxes are a part of life, no one wants to pay more than they must. For homeowners, property tax assessments can be a significant expense.
It can be upsetting to discover that your property taxes are increasing, especially if you don’t feel your home’s value has increased that much.
If you want to try and understand how to lower your property taxes, you will need to do some homework.
It would be best to educate yourself on how property taxes are assessed. This article will see a comprehensive review of how to lower your tax assessment if you believe it is inappropriate based on other similar properties.
First, you can visit your local assessor and ask how property taxes are determined and how an assessment can be appealed.
You can also get the field card for your property, which contains details that you may be able to contest.
A real estate agent may be able to help you gather evidence to prove that your home is only worth a certain amount, the evidence you could use to appeal your home’s assessment.
Remember that there are deadlines in many areas for challenging an assessment. If you want to change, submit your appeal before the deadline.
Tax Deductions When Purchasing A Home
One of the most significant differences between owning and renting a home is the allowable home-buying tax deductions. There are many deduction options for a home purchase.
You can deduct the cost of mortgage points – which allows you to lower your overall interest rate. You can also deduct your prorated mortgage interest and your prorated real estate taxes.
If you take out a construction loan to build a new home, you can deduct the interest if the house is your primary residence.
If you have a mortgage where prepayment carries penalties, you can deduct the penalties once you pay off the loan early. Mortgage insurance can also be deducted, as can your mortgage interest for loans up to $1 million if you are married and filing jointly.
If you use a home equity line of credit to purchase something, you can deduct the interest from the 2nd mortgage.
Working with a qualified accountant can help you take advantage of every available tax deduction from your home purchase. In the abovementioned article, I go into great detail about every tax deduction you can take advantage of when buying a house.
What Are Tax Credits in Real Estate?
Current tax credits for real estate can vary widely depending on the type of investment, development, or ownership involved.
Here’s a summary of some critical real estate-related tax credits available. I also provide comprehensive information on tax credits in my article reference.
- Opportunity Zones: These were created to encourage investment in underdeveloped areas. Opportunity zones allow investors to defer capital gains taxes by investing in Opportunity Funds dedicated to these zones.
- Historic Tax Credits: This credit is available for renovating historically significant buildings. It offers up to 40% of eligible construction costs for those meeting specific criteria.
- Low-Income Housing Tax Credit (LIHTC): This credit aims to promote affordable housing development. Since its creation in 1986, it has supported the construction of millions of homes for low-income residents.
- Residential Energy Credits: This is one of my favorite tax credits, and many people can use it. The Inflation Reduction Act has enhanced energy credits. The tax code significantly changes residential energy credits for 2023. This includes adjustments to the energy-efficient home improvement credit, which now has an increased annual cap for qualifying property
Knowing that each credit can have specific details, eligibility requirements, and a complex application process is essential.
For example, the Historic Tax Credit requires the building to be listed on the National Register of Historic Places. The property must also undergo substantial rehabilitation, and the improvements must comply with the Secretary of Interior’s Standards for Rehabilitation.
Utilize a 1031 Exchange
One of the popular things several of my clients have utilized over the years is a 1031 tax exchange. It is one of the best tax strategies for keeping more of your hard-earned money.
The 1031 is part of the U.S. Internal Revenue Code. It allows you to defer paying capital gains taxes on an investment property.
To take advantage of this, you must find a like-kind property or properties to reinvest the proceeds from your sale.
This tax strategy allows real estate investors to continue to grow their investments while deferring taxes usually due on the sale.
Here’s a simplified explanation of how it works:
How Does a 1031 Exchange Work?
Here is an elementary and simplified explanation of how it works:
- Sell an Investment Property: An investor will sell a property used for business or investment purposes.
- Identify Replacement Property: You will have 45 days to identify one or more replacement properties to buy after the sale. Specific identification rules must be followed.
- Complete the Purchase: You will get up to 180 days after the sale of the original property to complete the purchase of the replacement property or properties.
- Use a Qualified Intermediary (QI): A QI must facilitate the entire process. They will hold the proceeds from the sale of the original property and use them to acquire the replacement property to ensure the investor does not receive the funds. This is part of the process for the exchange to be valid.
It’s essential to note that the properties under consideration must be “like-kind.” This term has a loose definition, but it is broadly interpreted within real estate as any real property held for investment purposes.
The 1031 exchange is highly regulated. You must follow specific rules to qualify for the tax deferment. This includes timelines for identifying and purchasing replacement properties. There are also requirements regarding the values and use of the properties.
What Are The Advantages?
The benefits of a 1031 exchange include deferring capital gains taxes, which can significantly affect the profitability of real estate investments. It also allows investors to reallocate their investments without having an immediate tax liability. It provides the opportunity to adapt to market changes, diversify assets, or consolidate holdings.
I always recommend that anyone who asks me about a 1031 tax exchange speak to a qualified tax professional. Some professionals specialize in these types of real estate transactions.
Here is an Example
It will be helpful to give you an example of how the exchange can work.
Imagine an investor named Alex who owns a duplex she purchased five years ago for $300,000. Over the years, the duplex’s value has increased, and it is now worth $500,000. Alex decides to sell the property and, after the sale, realizes a capital gain of $200,000.
Instead of paying capital gains tax on this $200,000 profit, Alex reinvested the proceeds into a like-kind property through a 1031 exchange.
She uses a Qualified Intermediary (QI) to facilitate the exchange. The QI holds $500,000 from the duplex sale and uses it to purchase a small apartment building valued at $500,000, which Alex has identified within the 45-day identification period.
The entire transaction, from the duplex sale to the apartment building purchase, is completed within 180 days.
By reinvesting the entire $500,000 into the apartment building, Alex successfully defers paying capital gains taxes on her $200,000 profit. This allows her to use the total amount of her equity to invest in a more valuable property, potentially increasing her return on investment.
The 1031 exchange has enabled Alex to grow her real estate portfolio more efficiently by deferring taxes that would otherwise reduce her investing power.
This example illustrates the process and potential benefits of a 1031 exchange, including the importance of timelines, the role of the Qualified Intermediary, and the requirement for the properties to be like-kind.
Remember, while “like-kind” has a broad interpretation in real estate, ensuring the properties meet this and other IRS requirements is crucial for the exchange to qualify for tax deferral.
Conclusion
If you know the tax code, you can save money on real estate investments in many ways. The key is keeping up with how the tax laws change yearly. You must know the strategies that work; otherwise, you will leave money on the table.
I always recommend staying on top of this topic. If you don’t have a tax professional who does your taxes, reading publications that provide advice is even more valuable.
Additional Helpful Real Estate Tax Advice
- Real Estate Tax Center: The IRS website provides valuable tax information. You will love the helpful guidance provided.
- Tips for lowering a real estate tax assessment – see how to reduce your tax bill in the article at Active Rain.
- Tax deductions for buying a home – do you know the tax benefits of owning a home? Find out at Selling Warner Robbins.
Use these additional references to help make sound decisions about real estate taxes. The thing about taxes is that you can never be too educated! If you are familiar with the ground rules, there are always opportunities to save money on your taxes.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above information on the best real estate tax tips. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. For the past 38+ years, Bill has helped people move in and out of Metrowest towns.
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