How real estate can save on your income taxes

Tips for 2005 tax season
By: Robert J. Bruss: Inman News
Although the end of 2005 is several weeks away, it's not too early to plan for year-end tax savings. Real estate can play a major role in saving your tax dollars.

As always, before using these tax saving techniques, please consult your personal tax adviser for details. Even if you use just one or two of these methods, the result can save hundreds or even thousands of tax dollars:

1. BUY A PRINCIPAL RESIDENCE BY YEAR-END. This is the best time of the year to buy a home. As the holiday season approaches, each week there are fewer competitive home buyers in the market. Home sellers who have their residences listed for sale at this slow home sales time of the year are usually highly motivated to sell.

The loan fee you pay to obtain a home acquisition mortgage is fully tax-deductible as itemized interest. Also, mortgage interest you pay in 2005 is also tax-deductible. However, your home purchase must close by Dec. 31, 2005, to qualify.

2. SELL YOUR PRINCIPAL RESIDENCE BY YEAR-END. If you enjoy tax-free cash, selling your home can produce up to $250,000 (up to $500,000 for a qualified married couple filing jointly) tax-free capital gains. To qualify, Internal Revenue Code requires you to have owned and occupied your principal residence at least 24 of the 60 months before its sale.

3. USE A HOME EQUITY LOAN TO CONVERT NON-DEDUCTIBLE LOANS INTO TAX-DEDUCTIBLE INTEREST. If you pay non-deductible interest on a car loan, credit cards, student loan, or personal loan up to $100,000 total, obtaining a Home Equity Line of Credit (known as a HELOC) can convert that non-deductible loan interest into tax-deductible home equity interest when you pay off those loans.

Banks, credit unions and other lenders are eager to make you a home equity loan. For some unexplained reason, the default on home equity loans is virtually zero. Interest on such loans, up to $100,000, is tax-deductible as itemized interest.

However, if the purpose of your home equity loan is to use the funds for home improvements or in your business, there is no limit to the interest deductibility on your business tax returns.

4. REFINANCE YOUR HOME LOAN; DEDUCT ANY UNDEDUCTED LOAN FEE. If you hurry, you can refinance your home mortgage by year-end. Although loan fees paid on refinanced mortgages are not fully deductible in the year paid, they can be deducted (amortized) over the life of the mortgage.

When you refinance an existing mortgage, on which you are deducting amortized loan fees, in the year of the old loan's payoff you can deduct the entire undeducted loan fee.

Rather than pay a loan fee on a home mortgage refinance, it is usually best to obtain a so-called "no cost" refinanced mortgage. The tax-deductible interest rate might be slightly higher, perhaps one-eighth percent, than if you pay an up-front loan fee, but the mortgage interest you pay will be fully tax deductible.

5. PREPAY YOUR 2006 PROPERTY TAXES IN 2005. This tax saving method is not available in every county or city. However, many local tax collectors notify property owners of their 2006 property taxes in 2005, giving them the option to pay early.

For example, I always pre-pay my property tax for the next year by Dec. 31 so I can claim the pre-payment on my current year income taxes. A phone call to your local tax collector will inform you if your jurisdiction allows pre-payment of next year's property tax in 2005.

6. PREPAY YOUR JANUARY 2006 MORTGAGE PAYMENT IN 2005. Another big tax-saver for most homeowners is to prepay your January 2006 mortgage payment in December 2005 so you can deduct the January interest on your 2005 tax returns.

However, be sure to mail your mortgage payment in plenty of time so the lender will receive the payment in 2005 and include it on your IRS 1098 mortgage interest statement for 2005.

7. DEDUCT ANY UNINSURED CASUALTY OR THEFT LOSS. The year 2005 was one of our nation's worst years for natural disasters, especially Hurricane Katrina and Hurricane Rita. Many homeowners were not fully insured. They had to absorb huge losses.

But Uncle Sam wants to help cushion the financial loss. To qualify, a casualty loss must be caused by a "sudden and unexpected" event not paid by insurance, such as a fire, flood, hurricane, tornado, mudslide, accident, theft or other qualifying event.

However, only personal casualty losses exceeding $100 and over 10 percent of your 2005 adjusted gross income qualify.

To illustrate, suppose you paid $20,000 to repair your home after flooding, which was not paid by insurance. Your 2005 adjusted gross income is $60,000. Subtracting 10 percent, plus $100 ($6,100), from your $20,000 repair bill results in a $13,900 casualty loss deduction on your income-tax return.

If the casualty loss involved your business or rental property, the full amount of your uninsured casualty loss qualifies as a tax-deductible business expense.

8. DELAY TAXABLE HOME SALES UNTIL 2006. If you plan to sell your home, but your capital gain will exceed the $250,000 or $500,000 principal residence sale tax exemption of Internal Revenue Code 121 explained earlier, delay the closing date until after Jan. 1, 2006.

The reason is then you will have until April 15, 2007, to pay your capital gain tax on the profit exceeding your principal residence sale tax exemption up to $250,000 or $500,000.

9. IF YOU CHANGED JOB LOCATION IN 2005, DON'T FORGET YOUR MOVING-COST TAX SAVINGS. It doesn't matter if you are a renter or a homeowner, if you changed both your job location and your residence location in 2005, you are probably eligible to deduct your moving costs on your tax returns.

This special tax break is available even if you don't itemize your tax deductions and claim the standard deduction.

To qualify, you or your spouse must have a new job location that is at least 50 miles further away from your old home than was your old job site. For example, suppose your old job location was 4 miles from your old home. But your new job is at least 54 miles (4 plus 50) from your old home. You then qualify to deduct your moving costs.

Whether you became self-employed, changed employers, or continued working for the same employer doesn't matter. All that counts is you changed principal residences and job location. To prevent abuses, there are minimum employment times required in the vicinity of your new job location.

10. A TAX-DEFERRED EXCHANGE AVOIDS TAX ON A BUSINESS OR INVESTMENT PROPERTY SALE. If you want to sell your business or investment property, an Internal Revenue Code 1031 delayed tax-deferred exchange can avoid taxes.

To qualify, you must acquire one or more "like kind" replacement investment or business properties of equal or greater cost and equity.

So-called Starker Exchanges (named after T.J. Starker who created this tax concept) allow Internal Revenue Code 1031(a)(3) "delayed" tax-deferred trades. To qualify, the owner must have the sales proceeds held by a qualified third-party intermediary beyond the seller's "constructive receipt" until the exchange is completed.

The sales proceeds must then be used to acquire a qualifying replacement property of equal or greater cost and equity. But the seller has only 45 days to designate the qualifying replacement and up to 180 days to complete the title acquisition. Further details on these year-end tax savings methods are available from your personal tax adviser.