Real Estate Investing

I am dying here!  My oldest daughter earned a little bit of money last year working at a fast food place and now she wants back the taxes she paid.  She’s well below the income minimum of $9,350 (according to the IRS) to file but that $300 refund is very tempting to her.  Of course it may mean that we lose her as a tax deduction, but before we do we’re going to work up “dummy” tax forms using both scenarios (claiming her or she files for herself) and see where the least damage occurs. Then we’ll help her decide whether she stays on our filing or if she does her own.

On the flip side, we are able to take advantage of our home ownership tax deductions – a huge plus when you own real estate!   I usually beat the drum that a home is so much more than just an “investment” but I do like how Turbo Tax describes it as a “tax deduction.”  The biggest single deduction is the interest paid on your home loan – an especially juicy deduction when the home is fairly new because in the beginning most of your mortgage payments go toward interest.

Turbo Tax has other deductible items to remember when you figure out your real estate assets while working on your taxes, but it also outlines what you can not deduct for a personal residence,

• Dues to a homeowners association
• Insurance on your home
• Appraisal fees for your home
• The cost of improvements to your home, except in the relatively rare case where they qualify as a medical expense. (But keep those receipts. They may help you reduce your taxes when you sell your home.)

Allowable deductible medical expenses include lowering cabinets in the kitchen, building wheelchair ramps, widening entryways to be accessible, modifying hardware on doors, along with a slew of others that will help someone be able to function inside their own home.

Anytime you’re in doubt about what you can claim or deduct, consult with your accountant.  If you don’t have one, the IRS is available to help and they have many local offices set up to answer your questions or concerns.  Finding your local office is very easy when you go to the IRS web site.

Guess I’ll start pulling my receipts together.

If you want in on the $8000 tax credit for first time home buyers, time is running out for qualified buyers – you can’t have owned a home in the past three years, there’s a $75,000 income limit for singles, $150,000 for couples, and you still have to be able to buy (qualify for home loan with good income, good credit score).  The home must close on or before November 30, 2009.  Over 1.4 million people have taken advantage of the tax credit, according to CNN.com.   While the government has sweetened home buying for some, the deadline is part of what is helping build the success.

Paul Henderson, a Realtor from Lacey, Washington, is ready for the tax credit to end OR to extend it to more than just first time buyers.  He posts on his Active Rain blog site,

All this talk about extending the $8000 tax credit makes my skin crawl. Every time I see this on TV my phone quits ringing. Extending, does take the urgency out of the program which will make the true fence sitters extremely happy. Why make a decision today, when you can wait 6 months?

We’re finding in my own area that the inventory for affordable first time homes is getting low.  I have at least two buyers now looking for houses under $100,000 – there would’ve been about 30 to choose from two months ago, but now we have about ten … and these are the ones that are run down and just a hot mess.  The time urgency is definitely having an impact here.

Meanwhile the National Association of Realtors is lobbying to extend the $8000 credit and not just to FIRST TIME buyers.  They want to see a home credit go to ALL buyers.  However, the tax credit is not a magic bullet. Carla Muss-Jacobs, a broker in Beaverton, Oregon, says the credit can hurt her negotiation position,

How does the $8000 tax credit hurt my deals? First, sellers KNOW about the BUYER credit . . . it’s NOT a secret.  And since the sellers know this, they’re not very willing to: reduce their list price, or offer concessions.  WHY?  Because they know there’s $8,000 on the table from the government, so why cut a deal and give the buyers ANOTHER $5,000 for closing costs, for example?

All interesting, valid points.  What do you think?  Should the program end? Should it be extended?  Expanded?  We’ll know in the next couple of months!

Although April 15th is still almost three months away, people expecting to receive money back from Uncle Sam are already filing their tax returns.  Since becoming a real estate agent, my husband and I wait until April to file.  Though I save throughout the year and make quarterly payments, I still end up having to pay on April 15th.

Kiplinger’s has offered an article on the 11 Most Overlooked Tax Deductions and at least two are real estate related:

1.  Moving expenses to take first job.  Here’s an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible, but moving expenses to get to that first job are. And you get this write-off even if you don’t itemize. If you moved more than 50 miles, you can deduct the cost of getting yourself and your household goods to the new area, including 19 cents per mile for moves during the first six months of 2008, and 27 cents per mile for job move-related driving after June 30 (plus parking fees and tolls) for driving your own vehicle.
2. Refinancing points. When you buy a house, you get to deduct points paid to obtain your mortgage in one fell swoop. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Doesn’t seem like much, but why throw it away? Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender. In that case, you add the points paid on the latest deal to the leftovers from the previous refinancing and deduct the expense, which is pro-rated over the life of the new loan.

Read the article for more tax tips.

The Menkiti Group offers further tax tips for homeowners.

For most people, the biggest tax break from owning a home comes from deducting mortgage interest. Your lender will send you Form 1098 in January listing the mortgage interest you paid during the previous year. That is the amount you deduct on Schedule A tax form. Be sure the 1098 includes any interest you paid from the date you closed on the home to the end of that month. This amount is listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the Form 1098.

Be on the lookout for your W-2 forms coming by the end of this month.  Taking your receipts and other tax information to an accountant, tax attorney, or tax preparer may be well worth the cost and effort.