Real Estate Matters
Silver Edition. News & Issues for the Mature Market
Quarterly Newsletter –November, 2006
Ten Smart Tax Moves to Maximize Deductions, Minimize Pain
As you gear up for the holidays, keep the taxman—the IRS—in mind and make plans to minimize your tax hit when April 15th rolls around. A few smart moves before the end of the year could save you a bundle come spring. Qualifying for many tax benefits depends on individual circumstances, so it’s always wise to consult a qualified tax preparer. Here are some issues to ponder while you’re preparing your 2006 taxes.
1. Early mortgage and property tax payments
Pay your January, 2007 mortgage in December, 2006 and the mortgage interest for that January payment can be deducted on your 2006 taxes. Check with your local government to see if it’s possible to pre-pay property taxes and claim that deduction on your 2006 tax return.
2. Energy-efficient renovations
If you’ve modified your home with energy efficient products, such as solar panels, windows, and geothermal heat pumps, you may be eligible for a tax credit. The maximum credit is $500. Be aware that the rule has a few wrinkles. For instance, only $200 of that $500 can be taken for windows. Check to see whether your state has additional tax breaks for energy-efficiency improvements.
3. Investment Property
Tally up the receipts associated with your investment property. Repairs––things to keep the property in good working condition––are deductible during the year you pay them. More significant investments, such as a kitchen or bathroom overhaul or a major renovation, get depreciated over 27.5 years for residential real
estate. Major improvements on non-residential investment properties are depreciated over
4. Points and refinanced mortgages
If you paid points when you refinanced a home mortgage, points are deductible in full in the year paid, if the proceeds of the loan were used to improve your residence. If they were used for something else (new car, vacation, etc.) they’re deductible, but only over the life of the loan. “If this is a second refinance, and the taxpayer was amortizing previous points over the life of the loan, the remaining points not previously deducted are allowed in full, but only if the new loan is with a different lender,” says Cindy Hockenberry, an enrolled agent and a tax information analyst at the National Association of Tax Professionals, Appleton, Wisconsin.
5. 1031 Exchanges
Profits on the sale of rental property are treated as a capital gain and you’ll have to settle up with Uncle Sam. One option to defer paying that tax is to re-invest the proceeds in a like-kind exchange. “To the extent the proceeds are reinvested, the gain is deferred until the replacement property is sold,” says Deborah Rood, a CPA and senior tax manager with Chicago-based Blackman, Kallick, Bartelstein.
6. Vacation property
Carefully track how much time you spent at a vacation property. When you own and rent out vacation homes, expenses are generally allocated between rental use and personal use, based on the number of days of each use. If you use the home for 14 days or less, or less than 10% of the time it is available for rent, the expenses are all allocated to, and deducted from the rental income. If you meet this limited-use test, the vacation home is not considered used as a personal residence. Use by family members is counted as personal use by the owner, unless family members pay fair market rent.
7. Tax-free gifts
If you’re looking to reduce your taxable estate for heirs, one option is to gift money to children, grandchildren and others. Individuals can gift up to $12,000 (or $24,000 per couple) per year to anyone without tax consequences. Another option is to gift appreciated assets, such as a piece of real estate worth $12,000. “If I give a piece of real estate, it could be worth $15,000 in a few years and $30,000 down the road. It’s a way to legally give more than that $12,000 per year to someone,” comments Rood.
If your grandchild has a 529 college savings plan, you can contribute $12,000 per year and avoid any gift tax return filing requirement or gift tax liability. “That’s a great way to shift money to a grandchild and get money out of your estate,” says Hockenberry
8. Parental dependent care
If you’re supporting a parent and provide over
half of his or her support, such as nursing home and medical expenses, you may be able to claim him or her as a dependent. Rules are stringent, so check with your tax preparer to determine whether your parent meets the dependency requirements.
9. Charitable donations
Those 70½ or older can designate up to $100,000 of their IRA directly to a charity. “It’s a neat tool for Seniorswho might have a lot of money and are worried about estate tax issues. …a great way to give to their charity of choice and save some estate tax down the road for their heirs,” comments Hockenberry.
10. Tax advisors
Find a good tax advisor and tax return preparer. Rood recommends getting referrals from trusted friends, bankers and attorneys. Both Hockenberry and Rood advise seeking out someone with expertise in estate planning and Senior issues, so the person can offer long-term tax strategies versus just focusing on annual tax preparation.
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News & Issues for the Mature Market
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