Income Tax Savings

REAL ESTATE TAX IMPLICATIONS AND CONSEQUENCES

A tax is a monetary charged that is imposed by the government, through an agency known as the Internal Revenue Service (IRS), on people, entities, property, income, and transactions in order to generate public revenue. 

Several types of taxes are involved in the real estate context. 

Collateral-inheritance tax is a tax levied on the transfer of property that is accomplished by a will or, if a decedent died without a will, by intestate succession.  The tax is imposed only if the transfer is made to a beneficiary who is not the decedent´s spouse, parent, or descendant.  An estate tax, on the other hand, is a tax imposed on any transfer of property by will or by intestate succession, including a transfer to a spouse, parent, or descendant of the decedent.

A gift tax is imposed on a gift-that is, when property is transferred voluntarily or gratuitously.  Under federal law, a gift tax is payable by the gift-giver.  However, some states tax the recipient of the gift.

A property tax is a tax that is levied on the owner of a parcel of real property according to the assessed value of the property.  Property taxes are imposed by local governments, and vary widely among localities.  They are used to fund local resources such as school districts and municipal projects.

A transfer tax is imposed on the transfer of property, especially as such transfer is accomplished through a will, an inheritance, or a gift.

One of the most important taxes to be aware of with respect to real estate purchase and sale is capital gains tax.  A capital gains tax is a tax imposed upon income that is derived from a sale of a capital asset, which is any property owned by the taxpayer that is sold for a price greater than that at which the seller purchased it.  For example, a purchaser of real estate who subsequently sells the property for a profit is subject to a capital gains tax on the difference between the lower purchase amount and the higher resale amount. 

Capital gains taxes are levied at two levels: a higher rate for capital gains on short-term holdings, and a lower tax rate that is applicable to capital gains on long-term holdings.  IRS Publication 523, which is referred to commonly by real estate professionals as the "2/5 Rule," explains how capital gains can be excluded from taxation. 

Every homeowner gets an automatic tax exemption of $250,000 for the sale of a parcel of real property.  The 2/5 rule says that persons who have owned and lived on a particular parcel of real property, making that property their main home, for at least 2 years during the 5 year period immediately preceding the date of the sale of the property may exclude any gain they realize on the property sale.  The rule is intended to avoid a situation in which a homeowner is able to claim the $250,000 exemption twice within a single two-year period.

According to IRS Publication 523, a person may still be able to claim an exclusion in some circumstances, even if he or she has lived in the property in question as their primary residence for a period of less than two full years.  Furthermore, the two-year residency requirement need not always be continuous; in some circumstances, it is sufficient to be able to claim the exemption if a homeowner has lived in the property for a cumulative two years in the applicable five-year period.

The exceptions to the 2/5 rule are applicable in circumstances in which the sale of a home is the result of a change in employment, health, or unforeseen circumstances, such as material changes to a homeowner´s financial ability to maintain the property.  These exceptions are called "Safe Harbors," and are intended to protect homeowners who must sell a property for valid and necessary reasons from being liable for a tax that is designed to apply to real estate investors who use the purchase and sale of real property for the sole purpose of realizing a profit.

            Taxes associated with real estate transactions can be complex.  A Certified Public Accountant (CPA) or a real estate attorney can assist in understanding and handling tax consequences.
GBrey

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One of the most overlooked parts of buying a home is the tax implications it has. For those in the know, the tax savings is one of the biggest motivating factors in deciding to buy a home and not rent. While the impact of buying a home on your own personal tax situation will vary greatly depending on the area you live in and the tax bracket you´re in, you should research the tax implications completely before you begin your search so that you know what to expect when you sit down to fill out your forms. Here are some Buyers Tips for Purchasing Sarasota Real Estate.

• Make sure you know what is deductible and what isn´t. For instance, in almost all cases, the interest you pay on your mortgage is deductible from your gross income, which could mean big savings come tax time. Also, what you pay in property tax is also deductible, but you want to make sure that you check with a tax expert for the full impact on your income. If you´ve been filling out your taxes on your own before you decided to buy, then you might want to enlist the services of a professional for the first year that you own a home just to walk you through the different paperwork and procedures so that you know your forms are done right.

• Be aware that the tax laws change as you rise and fall from tax bracket to tax bracket. If you started a new job and that was one of the reasons why you just bought a home, then you will want to have your taxes professionally done to see how this change in tax bracket affects your tax obligation.

• If you have just moved into the Sarasota area, you might want to check with a professional to see how state, county and city laws affect your tax obligation when it comes to deducting interest from your mortgage and property tax deductions, as well.

• If you have just moved to Florida from out of state, make sure you understand the tax obligations that you may still have in the state you moved from. There can be lingering obligations that you are responsible for even after the sale of a home. Make sure your realtor who helped you sell your home before you moved to Florida briefs you on any final payments that need to be made and how that affects your tax forms for the next year.

• If you´re new to Florida, make sure you understand the Homestead Exemption law. The Homestead Exemption allows you to claim a portion of your home´s value as tax free so that you end up paying less in property taxes. This law can save you hundreds or even thousands of dollars depending on the size of your home and property. This also impacts your tax filing for the year since you´ll be paying less property tax than you thought and therefore limiting how much you can write off on your yearly tax forms.

• Make sure you save your tax statements. If you have a mortgage on your new home, the bank will be sending you a statement that will show you how much interest you paid on your mortgage that year. Use this statement along with your earnings statements to fill out your taxes. You should also have a copy of your property tax bill that can also be used to help you fill out your tax forms accurately if you choose to file by yourself and not use a professional.

As you can see, buying a home can seriously impact your yearly tax filings. In most cases, buying a home is a huge boost to the amount of tax you save since there are so many deductions, like mortgage interest and property tax. But before you fill out your forms for the year, make sure you completely understand how this new tax situation affects your situation. If you´ve moved up or down tax brackets of if you´ve moved to Florida from out of state, make sure you understand how local laws help you to save even more come tax time. Don´t be afraid to enlist the help of a professional to make sure you´re making the best choice for you and for your family with the help from Buyers Tips for Purchasing Sarasota Real Estate.

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