Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

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Archive for the ‘realty’ Category

Why it’s best to pay your own property taxes & insurance…

Posted by taxguru on February 23, 2015

For decades I have been warning people about the dangers of relying on lenders to handle their property tax and insurance payments via impound accounts. Many people have the false impression that using a lender impound account is more convenient than having to pay these bills themselves.  I have seen far too many cases where lenders have missed payments on both property taxes and insurance.  This is even more likely to occur when a loan is sold to a different lender than you started with, or lenders merge, which happen with almost all loans.

Besides the risk of losing one’s house for unpaid property taxes, as in this recent case, there are other pitfalls to depending on lenders.  I have frequently had to be the bearer of bad news and explain to clients that they can’t deduct payments to their lenders’ impound accounts if the property taxes weren’t actually paid to the County.  Under IRS rules, the lender is considered to be an agent of the taxpayer, and if they are still holding onto that money as of December 31, it’s the same as if nothing was paid for the taxes.

In a similar vein, even with lenders who pay the property taxes, they normally make those payments at the latest possible date. This removes a very common tax planning technique, which is to make the next year’s property tax payment in December of the year before in order to get the tax benefit a year earlier.  With no impound account, you have the freedom to do this.  With an impound account, you are SOL and the lender will laugh in your face if you request an early payment of the taxes.

An even more extreme danger is the nonpayment of homeowner’s insurance.  I have seen cases where homes have burned to the ground and then the homeowners discovered that their insurance coverage had lapsed because the lenders hadn’t sent in the premium payments, even though all of the loan payments had been made on time.

I am fully ware that in some cases, such as with a low down payment (usually less than 20%), lender impound accounts are mandatory in order to obtain the loan. However, in cases where it is optional, borrowers should definitely opt out of the impound account and pay their own taxes and insurance.  What many borrowers don’t know is that, for cases where a loan began with a mandatory impound account, that can be changed after a few years, as the borrower’s equity grows to over the 20% level.  This will sometimes require an appraisal or Realtor CMA to verify; but is well worth it to get away from the risky situation of having lenders in control of your fate with taxes and insurance.

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Posted in lenders, realty | Comments Off on Why it’s best to pay your own property taxes & insurance…

Posted by taxguru on January 3, 2010

Cash-rich real estate investors trigger bidding wars, frustrate other buyers – I knew that this eventually had to happen, as the large pools of investor money moved from the intangible and often phony assets in the stock markets to the real tangible assets such as precious metals and real property.  This is a very good sign during these extremely confusing economic times.

 

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First-Time Homebuyer Credit

Posted by taxguru on August 3, 2009

Q:

I just closed escrow on the purchase of my first ever house in July 2009. Is my Realtor correct that I can file an amended 2008 tax return to claim the special credit for first time homebuyers? Is he also correct that this credit is mine to keep forever and doesn’t need to be repaid? I had read somewhere that the credit was just an interest free loan that had to be repaid on future tax returns. It sounds too good to be true.

A:

Your Realtor is correct that you won’t have to wait until April 15, 2010 to receive this credit, which can be as much as $8,000. You have the option to claim the credit on your original or amended 2008 1040, as long as the purchase has been completed.

As always, this kind of thing should be handled by a professional tax preparer, whose software should have the ability to properly calculate the credit on Form 5405. This can get tricky if your modified Adjusted Gross Income is over $75,000 ($150,000 for married couples) because that places you into the dreaded “Evil Rich” category as defined by our imperial rulers in DC.

In regard to repaying the credit, there was a change in the original program from what we had in 2008. For homes purchased in 2008, the credit must be repaid in 15 annual installments, starting with the 2010 1040. If the home ceases to be the main residence before the 15 year repayment tine is up, the remaining amount of the credit will be due in one lump sum on that year’s 1040.

For homes purchased between January 1, 2009 and December 1, 2009 (the current end of the credit qualification period), the credit does not have to ever be repaid if you use the home as your primary residence for at least three years. If you move out of the home, sell it or convert it to business or rental usage before the three year anniversary of your purchase, you will be required to repay the full amount of the credit in one lump sum on the tax return for the year in which the home ceased to be your principal residence.

If you don’t already have your own professional tax preparer, be careful of who you use to prepare the amended 1040. As IRS has announced in this press release, they have discovered some unscrupulous preparers who are soliciting clients who don’t actually qualify for the credit. If you happen to use one of those preparers, your credit will be disallowed and your full tax return will most likely be audited by IRS.

As with any tax law, there are even more twists to this one; so be sure to work with a professional tax advisor.

Good luck. I hope this helps.

Kerry Kerstetter

Posted in Credits, realty | Comments Off on First-Time Homebuyer Credit

Selling gifted property

Posted by taxguru on January 14, 2008

Q:

Subject: Tax Question

 

Kerry,

First, thanks for your blog.  You’re a great resource for all of us out there.  I have a question regarding some gifted property- I’m grasping at straws at this point, but I’m hoping that you can help:

First, my wife and I live in California and make ~$150K/year.  We just bought our first house and we have no children.  Just in case these detail help.

 Now to our “problem” – in Nov. 2005, my wife’s parents gifted us a piece of land worth ~$700K on which to build a home.  This is bare land, purchased in ~1978, and has a basis of ~$10K.   After spending ~$60K on permits, engineering, and architecture we decided against building a home on the land.  We’re now planning to sell the land and we’re trying to minimize our tax exposure.

 I think that we did this in the worst possible way, as I think we’re going to take the cap. gain hit on the delta between my in-laws’ basis and the sales price (minus our expenses) and my in-laws estate will be hit for the full $700K against their $2M of tax free estate (yes, they’re likely to exceed that $2M).  Other than a 1031, is there any way to minimize either the taxes or the amount counted toward my in-laws estate?  Are there creative ways to minimize the state or federal tax exposure?  Is there anything that would allow us to invest any/all of this money in a tax-free retirement account?  I know that I’m grasping at straws.

 Is there anything we can do????

 Thanks,

A:

If you have been reading my stuff for any length of time, you should know that you need to be working directly with a professional tax advisor to ensure that you do things properly.

You do have a bit of a messy situation here in regard to the built in capital gain you accepted from your in-laws.

You do really need to review various scenarios with a tax pro to see if any of them could assist. 

A 1031 exchange could possibly be appropriate if you can make the case that the old property was used for investment and not personal purposes.  You would then have to work with an exchange accommodator to use the proceeds to acquire new business or investment real estate; not personal use property.

I’m a little confused by your wording as to the status of your in-laws.  Are they still alive or have they passed away?  Another option that you may want to explore if they are still alive is to give the property back to them and possibly have them sell the property to you rather than gift it.  That could get messy; so their professional tax advisor would definitely need to be in on those discussions.  There are special tax breaks for them and you if they were to sell the property to you on the installment basis (carryback note) and then have that note as part of their estate after they pass away.

If you do sell the property, another way to spread the tax bite out is to carry back as much of the price as you can so that taxes can be spread out over the years in which you collect the payments.

These are just a few of the issues that you all need to discuss with your own professional tax advisors.

Good luck.

Kerry Kerstetter

 

 

Posted in 1031, CapGains, realty | Comments Off on Selling gifted property

Selling mixed use property

Posted by taxguru on November 28, 2007

Q:

Subject: Exchange Question

 

My wife and I live in the front house. When does the rental back house cease becoming a 1031?  Does not receiving rent make it no longer a 1031(for how long)? Is there a statute of limitations for it to qualify as exempt?  I don’t want to pay a capital gain tax on it when I sell this 2on1 Calif. property.

Tx,


A:

This is the kind of thing you really need to be handling with a professional tax advisor to ensure that you are doing things properly.

From your very short description, it sounds like you have what’s called a mixed use property; part residential and part rental.  For IRS purposes, it is treated the same as two separate properties, with the personal residence portion of interest and property taxes deducted on your Schedule A and the expenses for the rental portion on Schedule E.  The actual allocation of joint expenses may not be 50/50 if the two halves of the property are not equal in size and/or value.  An experienced tax pro can help you come up with an appropriate allocation between the two halves.  The cost basis of the property also needs to be allocated between the personal residence and rental portions, with deprecation claimed on the rental portion, which will reduce its cost basis (aka book value).

In regard to the treatment of a sale of the property, the portion of the sales price that is allocated to your primary residence will be treated as a Section 121 possibly tax free sale, as I have explained on my website.  

The portion of the sales price allocated to the rental half will not be eligible for the tax free exclusion, and will need to be set up as a Section 1031 exchange if the taxable gain warrants it.

If I’m reading into your question properly, and you are asking how long it will be until the rental portion of the property can become eligible for the tax free Section 121 treatment, the answer is never, as long as it is being rented.  If the tenants leave and you convert the rental part to be an extension of your own primary residence, the clock can start on the personal use test, which is generally two years.

You didn’t say how you acquired this current property.  As an added twist, if you acquired it via a 1031 exchange, you will have had to own it for at least a full five years prior to its sale in order to be able to utilize the Sec. 121 tax free exclusion.  Again, an experienced tax pro can assist you with this rule.

I hope I hit on your situation.  Working directly with a professional tax advisor will result in more usable numbers for your precise situation than the generalities I have to use.

Good luck.

Kerry Kerstetter

 

 

Posted in 1031, humor, realty | Comments Off on Selling mixed use property

Posted by taxguru on September 19, 2007

Special IRS Web Section Unveiled for Homeowners Who Lose Homes; Foreclosure Tax Relief Available to Many – Here is a direct link to the IRS FAQ page on foreclosures.

As I’ve said before, this entire issue is being blown way out of proportion in regard to its negative tax consequences. Most people who suffer foreclosures will either have nondeductible losses or be more than covered by the Section 121 tax free exclusion.

Posted in 121, IRS, realty | Comments Off on

Posted by taxguru on August 22, 2007

Foreclosure’s other shoe: a big tax bill – Nothing new here.  Debt relief has always been considered income.  I don’t see this as that big a deal because I’m sure many of the people who have gains from foreclosures will also have qualifying unforeseen circumstances that allow the prorated tax free exclusion of gain under Section 121.

Posted in realty | Comments Off on

Posted by taxguru on June 9, 2007

Using Real Estate to Build Your Retirement Portfolio – Using self directed IRAs to invest in real estate can be a much more reliable method of amassing wealth than gambling on the stock market.

 

 

Posted in realty, Retire | Comments Off on

Posted by taxguru on June 5, 2007

The Perils of Holding Real Estate in a Corporation – Besides the never-ending question of what type of business entity is appropriate for a particular business activity, another important issue is how to hold title to business and investment assets.  While, as with practically every aspect of taxes, there is no one size fits all answer to this, there is one key way in which to frame the question.  Is the asset expected to increase or decline in value, because the real differences crop up with assets that will be sold at a gain.   

 

Posted in corp, realty | Comments Off on

For the Realtors…

Posted by taxguru on May 22, 2007

Posted in comix, realty | Comments Off on For the Realtors…