Wednesday, March 06 2013
Rumors about the 3.8% Medicare tax continue to circulate. Here's the definitive word on what's true and what's not on how the tax impacts real estate.
Ever since health care reform was enacted into law more than two years ago, rumors have been circulating on the Internet and in e-mails that the law contains a 3.8 percent tax on real estate. NAR quickly released material to show that the tax doesn’t target real estate and will in fact affect very few home sales, because it’s a tax that will only affect high-income households that realize a substantial gain on an asset sale, including on a home sale, once other factors are taken into account. Maybe 2-3 percent of home sellers will be affected.
Nevertheless, the rumors persist and the latest version that’s circulating falsely say NAR is advocating for the tax’s repeal. But while NAR doesn’t support the tax (it was added into the health care law at the last minute and never considered in hearings), it’s not advocating for its repeal at this time.
The characterization of the 3.8 percent tax as a tax on real estate is an example of an Internet rumor, says Heather Elias, NAR’s director of social business media. Elias and Linda Goold, NAR’s director of tax policy, sat down for a discussion of how the tax works and how Internet rumors work and you can find their remarks in the 6-minute video below.
Goold says the tax will affect few home sellers because so many different pieces must fall into place a certain way for the tax to apply. First, any home sale gain must be more than the $250,000-$500,000 capital gains exclusion that’s in effect today. That’s gain, not sales amount, so you really have to reap a substantial amount for the tax to even come into play. Very few people are walking away with a gain of more than half a million dollars today, even in the high-end home market, so right off the bat only a few home sellers would be a candidate for the tax.
For the few households that do see a gain of more than the $250,000-$500,000 exclusion (that’s $250,000 for single filers and $500,000 for joint filers), only the amount above the exclusion would be factored into the tax calculation, and that would still only apply to high-income households, which the law defines as single people earning $200,000 a year and joint filers earning $250,000 a year.
So, if you are a households with annual income of $250,000 or more and you earn a gain of more than $500,000 on your house (again, that’s after the $500,000 exclusion), any amount of gain above the exclusion would be plugged into a formula to see if it’s taxable. If it turns out that it’s taxable, then the amount could be subject to the 3.8 percent tax. If the household had a gain of more than $500,000 but only earned $249,000 a year in income, the tax wouldn’t apply.
(Note that these are just hypothetical examples. To know if a case would really be subject to the tax, a professional tax preparer or tax attorney has to look at all the particulars of the tax filer’s case. Only a tax professional is in a position to say the tax is applicable, but the examples cited here could help you get a sense of how the tax works.)
The other thing about the tax worth noting is that, although it takes effect in 2013, any impact on taxes wouldn’t happen until 2014. That’s because the tax filer would do the calculation in 2014 for the 2013 tax year. Because it’s not a tax on a real estate sale but rather on a capital gain, it’s not calculated at the time of an asset sale, whether that asset is a house or something else. It’s calculated at the time the filer figures his or her tax.
This is all explained clearly in the video, so if you have questions about how the tax works, or if you’re still hearing rumors about the tax and you’re not certain of the accuracy of what you’re hearing, the video should prove helpful.
Tuesday, February 14 2012
Technically speaking, April 15th is tax day. But for Americans who expect a refund - including many homeowners who want to cash in on real estate-related tax perks - filing sooner holds the promise of getting that check in hand, stat. If you count yourself in that number, here’s a handy guide for 9 pieces of paper you should be sure to round up as you prepare to file, in order to reap every penny of the tax rewards you’ve earned by virtue of owning a home.
1.Mortgage Interest Statement
IRS Form 1098. The meatiest real estate tax deduction on the books is the one that allows you to deduct 100 percent of the mortgage interest you paid in a year - including prepaid interest or points you might have paid at close of escrow, if you bought a home last year. By now, you should have received in the mail a Form 1098 from your mortgage lender that reports how much that interest totaled up to in 2011. If you itemize your taxes and claim a mortgage interest deduction, you must include this form with your tax form when you file.
(If you haven’t received yours yet, most lenders that have online account management services also post the form digitally in your secure account on the web. Just login like you would to make your monthly payment, and look for a notice that says you can now download your 2011 Form 1098.)
2.Property Tax Statements
In addition to deducting your mortgage interest, if you own a home you are eligible to deduct the property taxes you pay to your local city, county and/or state. You are not allowed to deduct some of the other miscellaneous expenses that some localities bundle up with the taxes they collect, like waste management and local assessments for things like street lighting, libraries and sidewalk construction. To get this deduction right, the best practice is to have your property tax statements at hand and make sure you’re only deducting what’s allowed.
If you bought your home this year, it’s highly possible that you might not even have received a property tax statement yet - if that’s the case, look to #3, below.
3.Uniform Settlement Statement (HUD-1)
If you bought or sold a home last year, right after closing you should have received a form called the HUD-1 Settlement Statement (hint: it’s usually on legal-sized paper and contains an accounting of credits and debits for you and your home’s buyer or seller). That form documents a number of line items which might help you out at tax time, including prepaid interest, the prorated property taxes you paid at closing, and closing costs like original fees and discount points. Some states offer tax credits for buying a foreclosure; check with your tax pro to find out if any such credits apply to you. If so, this statement might be your ticket to lower taxes.
And here’s another handy hint - if you can’t find your copy, you might have gotten it on a disk - and you can always email your real estate or escrow agent for a copy, as well.
4.Moving Expense Receipts
Moving expenses are tax deductible, if your move is closely related, both in time and in place, to the start of work at a new or changed job location and you meet the IRS’ time and distance tests. Long story short, your new home must be at least 50 miles farther from your new workplace than your old home was from your prior place of work, and you must work essentially full-time. So, if you bought or sold a home and moved in 2011, you’ll need to include receipts from expenses you incurred making the move (meals not included) in your tax prep paperwork.
5.Cancellation of Debt Statement - IRS Form 1099. Homeowners who lost a home to foreclosure, or divested of one by negotiating a short sale or deed in lieu of foreclosure with their lender might receive some version of Form 1099 from their lenders, charging them with income in the amount of the mortgage debt that has been cancelled. You see, if you borrow money from someone, then they cancel the debt, that money you originally borrowed becomes income in the eyes of the IRS - and income is, as you know, taxable.
6.Utility statements for home office. For the average everyday homeowner who works at their employer’s place of business, utilities are not deductible (sorry!). But if there is a part of your home that is “regularly and exclusively” used for business, you might be able to claim that portion of your home as a home office, and deduct some portion of your home utilities and costs of painting and repairs, as a result. Talk with your tax provider about what expenses are allowable to be claimed under your home office deduction, and whether or not you should take it.
7.Income and Expense statements from rental properties. Some of you have elevated the art of home ownership to a business! If you are a landlord, your tax situation is more complicated than that of the average bear; you’ll need to have complete income and expense statements when you put your tax returns together. It might actually behoove you to consult with a tax professional to make sure you are appropriately depreciating the property over time and not taking deductions that will expose you to the risk of audits, as well as to begin cultivating a long-term tax strategy for your real estate portfolio.
8.Contractor receipts from energy efficient home improvements. Under the Nonbusiness Energy Tax Credit, homeowners who have made improvements to their homes that fall within a list of energy efficient upgrades might be eligible to claim tax credits. If, during 2011, you installed energy efficient improvements such as insulation, new dual-paned windows and furnaces, you might be eligible for a tax credit of 10 percent of the cost of these upgrades, up to $500 - only $200 of which may be used to offset the cost of windows.
9.Mortgage Credit Certificate (MCC). If you own a home you bought in the last few years using a Mortgage Credit Certificate issued by a local housing authority, that Certificate may entitle you to a pretty hefty tax credit, based on a percentage of the mortgage interest you paid - on top of your mortgage interest deduction. MCCs apply as long as you live in the home and have a mortgage on it, but they only apply to defray taxes you actually owe - you can’t use them to get a refund. In any event, your mortgage credit certificate, if you have one, is a must-have document as you start putting your tax prep plan in play.
No matter what your tax situation is, if you own a home, it absolutely cannot hurt to get some professional help and advice to make sure you maximize your deductions, while minimizing your exposure to audit. And you should always consult with a tax attorney or certified public accountant regarding your tax liabilities and implications when you buy, sell, short sell or lose a home to foreclosure.
Friday, February 19 2010
Keeping track of the cost of capital improvements to your home can really pay off on your tax return when it comes time to sell.
It’s no secret that finishing your basement will increase your home’s value. What you may not know is the money you spend on this type of so-called capital improvement could also help lower your tax bill when you sell your house.
Tax rules let you add capital improvement expenses to the cost basis of your home. Why is that a big deal? Because a higher cost basis lowers the total profit—capital gain, in IRS-speak—you’re required to pay taxes on.
The tax break doesn’t come into play for everyone. Most homeowners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to track capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.
What counts as a capital improvement?
While you may consider all the work you do to your home an improvement, the IRS looks at things differently. A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition. According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.
Capital improvements can include everything from a new bathroom or deck to a new water heater or furnace. Page 9 of IRS Publication 523 has a list of eligible improvements. There are limitations. The improvements must still be evident when you sell. So if you put in wall-to-wall carpeting 10 years ago and then replaced it with hardwood floors five years ago, you can’t count the carpeting as a capital improvement. Repairs, like painting your house or fixing sagging gutters, don’t count. The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life.
How capital improvements affect your gain
To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name a few. You should be able to find all those costs on the settlement statement you received at your closing.
Here’s where it gets interesting. Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you’ve saved about $3,750 in taxes (based on the current 15% tax rate on capital gains). Well worth taking an hour a month to organize your home-improvement receipts, don’t you think?
Watch out for these basis-busters
Some situations can lower your basis, thus increasing your risk of facing a tax bill when you sell. Consult a tax advisor. One common one: If you take depreciation on a home office, you have to subtract those deductions from your basis. Any depreciation taken if you rented your house works the same way. You also have to subtract subsidies from utility companies for making energy-related home improvements or energy-efficiency tax credits you’ve received. If you bought your home using the federal tax credit for first-time homebuyers, you’ll have to deduct that from your basis too, says Mark Steber, chief tax officer at Jackson Hewitt Tax Services.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.
Donna Fuscaldo has written about personal finance for more than 10 years at the Wall Street Journal, Dow Jones Newswires, and Fox Business. She’s currently remodeling her home—and aiming to make a profit on it one day.