Property Management » Real Estate Sales

Tax Tips for Homeowners of Short Sale or Foreclosed Real Estate

Property Management Software — Mon, 15 Mar 2010 11:01:49 +0000

Short Sale or Foreclosure Tax Tips

If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012 due to short sale or foreclosure, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness due to short sale or foreclosure.

1. Normally, debt forgiveness due to short sale or foreclosure results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

Homeowners who participated in short sale or had their real estate property foreclosed, take full advantage of the tax benefits available to you and pay no taxes on forgiven debt.

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Real Estate Capital Gains

Property Management Software — Sun, 28 Feb 2010 05:49:51 +0000

Real Estate Capital Gains

Have you heard of real estate capital gains and losses? If not, you may want to read up on them because they might have an impact on your tax return. The IRS wants you to know these ten facts about gains and losses and how they could affect your tax situation.

1. Real Estate investment properties are capital assets

2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

3. You must report all capital gains.

4. You may deduct capital losses only on investment property,

5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.

7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2009, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.

8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13of Form 1040.

For more information about reporting capital gains and losses, CLICK HERE

This blog post for Real Estate Professionals, Investors, Landlord, Property Manager, and Property Management Companies is brought to you by SimplifyEm Pay Rent Online and Property Management Software

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Tax Planning | Real Estate Loss, Convert to Investment Property for 2 Years

Property Management Software — Mon, 01 Dec 2008 08:05:21 +0000

You cannot claim a loss from the sale of personal residences, but you can deduct losses from rental property sales. If it looks like you are going to be taking a loss on your primary home, consider moving out and renting out the property before selling it.

The best advice would be to hold off on selling the property until the market gets better and you can actually sell for a profit, but you shouldn’t hold your breath if it looks like you’re going to lose more money. It may be more beneficial to move out of your home and rent it out before selling, so you can actually deduct the loss from the sale.

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Sell Property to Yourself | S Corp Capital Gains Tax Planning

Property Management Software — Mon, 01 Dec 2008 08:00:08 +0000

Selling property to an S-Corporation may be beneficial in some specific situations, like if you are trying to meet requirements for the two year rule ($250/500k exclusion), or if you are trying to take advantage of depreciation on appreciated property.

For example, say you lived in a property for three years, and rented it out for the next seven years – since you haven’t lived there for two out of the last five years, you cannot sell the property as a primary residence to avoid the capital gain.

However, after moving out of the property, you sell it to your own S-Corporation, which allows you to exclude capital gain (up to $250k, $500k if married filing jointly) because requirements for the two-year rule have been met. The other advantage is you can have a new basis for depreciation on your appreciated property.

Say you purchased a home for $50k many years ago, and it is worth $500k now. If you decided to rent it out, the basis for depreciation would be the original basis of $50k. But after selling it to your S-Corporation, you can depreciate the new basis of $500k. Clearly this will bring you substantial tax savings.

Selling to your S-Corp isn’t for everyone though. You should avoid using this strategy if you cannot take advantage of the exclusion amount. For example, you sell your primary residence with a gain of $240k to your S-Corp, and pay no tax due to the exclusion. However, if you did not meet the exclusion, the $240k gain would be taxed at ordinary income tax rates, and it would have been more beneficial to just sell the property and pay capital gains tax of 15% instead.

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Capital Gains Tax Planning | Universal Exclusion for Sold Rental Property

Property Management Software — Mon, 01 Dec 2008 07:04:29 +0000

There are some exceptions to the Universal Exclusion (2 Year Rule), which allows exclusion on the gain from the sale of a primary residence.

If the two-year use or ownership requirement is not met, or even if the exclusion has been used within the last two years, you may still qualify for a partial or full exclusion if the primary reason for the sale was change in employment, health reasons, or other unforeseen circumstances.

A partial exclusion is available if the two year rules have not been met, and is prorated for the number of months the exclusion has been met. For example, you sell your home you have lived in for 12 months for a new job in another town. Had you owned and occupied the home for 2 years, you would qualify for the full exclusion, but since 12 months out of the 24 month requirement have been, you are entitled to 1/2 of the exclusion.

A full exclusion is available if the homeowner becomes physically or mentally incapable of self-care. For example, you move into a rental property that you plan on selling after two years so you can exclude the gain. The property is sold after a year because you are diagnosed with Alzheimer’s and must move to a nursing home for proper care. Even though the two-year requirement has not been met, you qualify for the full $250,000 exclusion on the gain from the sale.

If you want to learn more about this one read pages 14-17 of IRS Publication 523.

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Tax Planning | Avoid Capital Gains Tax on Rental Property you Want to Sell

Property Management Software — Mon, 01 Dec 2008 07:02:26 +0000

To avoid paying capital gains tax on rental property you want to sell, consider moving into the property and making it your principle residence before selling it.

Gain on the sale of your principal residence can be excluded from taxable income if you have lived in the home for two out of the past five years.

If you sell your personal residence, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). The exclusion can only be used once every two years. New tax laws limit the amount you can deduct, so you should check with a tax advisor.

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Sold Investment Property | Minimize Capital Gains Tax, Deduct Closing Costs

Property Management Software — Mon, 01 Dec 2008 07:01:44 +0000

You can minimize the taxable gain from the sale of a property by accounting for your sale expenses, like closing costs. Closing costs that you need to consider can be found on the property’s settlement statement.

To minimize your taxable gain from the sale, first locate the Contract Sales Price (Line 401) on the settlement statement. Subtract Commissions Paid (Line 703), Title Charges (Lines 1100-1110), Recording and Transfer Charges (Lines 1200-1205) and Additional Settlement Costs (Lines 1300-1302).

Next, subtract the property’s adjusted cost basis (after depreciation deductions), which will be found on the prior years’ tax return.

This will give you the minimum taxable gain for your sold property.

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