US Military extended home buyer tax credit deadline is right around the corner.  Watch this informational video by the IRS for details.

Tax Tips: Mortgage Debt Forgiveness

Tax Tips: What If?

Don’t rouse the IRS or pay more taxes than necessary—know the score on each home tax deduction and credit.

Sin #1: Deducting the wrong year for property taxes

You take a tax deduction for property taxes in the year you (or the holder of your escrow account) actually paid them. Some taxing authorities work a year behind—that is, you’re not billed for 2010 property taxes until 2011. But that’s irrelevant to the feds.

Enter on your federal forms whatever amount you actually paid in 2010, no matter what the date is on your tax bill. Dave Hampton, CPA, tax manager at the Cincinnati accounting firm of Burke & Schindler, has seen home owners confuse payments for different years and claim the incorrect amount.

Sin #2: Confusing escrow amount for actual taxes paid

If your lender escrows funds to pay your property taxes, don’t just deduct the amount escrowed, says Bob Meighan, CPA and vice president at TurboTax in San Diego. The regular amount you pay into your escrow account each month to cover property taxes is probably a little more or a little less than your property tax bill. Your lender will adjust the amount every year or so to realign the two.

For example, your tax bill might be $1,200, but your lender may have collected $1,100 or $1,300 in escrow over the year. Deduct only $1,200. Your lender will send you an official statement listing the actual taxes paid. Use that. Don’t just add up 12 months of escrow property tax payments.

Sin #3: Deducting points paid to refinance

Deduct points you paid your lender to secure your mortgage in full for the year you bought your home. However, when you refinance, says Meighan, you must deduct points over the life of your new loan. If you paid $2,000 in points to refinance into a 15-year mortgage, your tax deduction is $133 per year.

Sin #4: Failing to deduct private mortgage insurance

Lenders require home buyers with a downpayment of less than 20% to purchase private mortgage insurance (PMI). Avoid the common mistake of forgetting to deduct your PMI payments. However, note the deduction begins to phase out once your adjusted gross income reaches $100,000 and disappears entirely when your AGI surpasses $109,000.

Sin #5: Misjudging the home office tax deduction

This deduction may not be as good as it seems. It often doesn’t amount to much of a deduction, has to be recaptured if you turn a profit when you sell your home, and can pique the IRS’s interest in your return. Hampton’s advice: Claim it only if it’s worth those drawbacks.

Sin #6: Missing the first-time home buyer tax credit

If you met the midyear 2010 deadlines, don’t forget to take this tax credit into account when filing.

Even if you missed the 2010 deadlines, you still might be in luck: Congress extended the first-time home buyer credit for military families and other government workers on assignment outside the United States. If you meet the criteria, you have until June 30, 2011, to close on your first home and qualify for the tax credit of up to $8,000.

Sin #7: Failing to track home-related expenses

If the IRS comes a-knockin’, don’t be scrambling to compile your records. Many people forget to track home office and home maintenance and repair expenses, says Meighan. File away documents as you go. For example, save each manufacturer’s certification statement for energy tax credits, insurance company statements for PMI, and lender or government statements to confirm property taxes paid.

Sin #8: Forgetting to keep track of capital gains

If you sold your main home last year, don’t forget to pay capital gains taxes on any profit. However, you can exclude $250,000 (or $500,000 if you’re a married couple) of any profits from taxes. So if you bought a home for $100,000 and sold it for $400,000, your capital gains are $300,000. If you’re single, you owe taxes on $50,000 of gains. However, there are minimum time limits for holding property to take advantage of the exclusions, and other details. Consult IRS Publication 523.

Sin #9: Filing incorrectly for energy tax credits

If you made any eligible improvement, fill out Form 5695. Part I, which covers the 30%/$1,500 credit for such items as insulation and windows, is fairly straightforward. But Part II, which covers the 30%/no-limit items such as geothermal heat pumps, can be incredibly complex and involves crosschecking with half a dozen other IRS forms. Read the instructions carefully.

Sin #10: Claiming too much for the mortgage interest tax deduction

You can deduct mortgage interest only up to $1 million of mortgage debt, says Meighan. If you have $1.2 million in mortgage debt, for example, deduct only the mortgage interest attributable to the first $1 million.

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.

G.M. Filisko is an attorney and award-winning writer who was once mortified to receive a letter from the IRS—but relieved to learn the IRS had simply found a math error in her favor. A frequent contributor to many national publications including AARP.org, Bankrate.com, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.

Get an “A” on your Schedule A Form: Dodge these tax deduction pitfalls to save time, money, and an IRS investigation.

Schedule A (http://www.irs.gov/pub/irs-pdf/f1040sa.pdf) is the part of Form 1040 you use to list myriad deductions, and the more moving parts, the more prone you are to misinterpretation. To save you heartache, we asked four tax experts to weigh in on the six most common Schedule A mistakes do-it-yourselfers make.

Trap #1: Line 6 – real estate taxes

Your monthly mortgage payment often includes money for a tax escrow, from which the lender pays your local real estate taxes.

The money you send the bank may be more than what the bank pays for your taxes, says Julian Block, a tax attorney and author of Julian Block’s Home Seller’s Guide to Tax Savings. That will lead you to putting the wrong number on Schedule A.

Example:

• Your monthly payment to the lender: $2,000 for mortgage + $500 escrow for taxes

• Your annual property tax bill: $5,500

Now do the math:

• Your bank received $6,000 for real estate taxes, but only paid $5,500. It may keep the extra $500 to apply to the next tax bill or refund it to you at some point, but meanwhile, you’re making a mistake if you enter $6,000 on Schedule A.

• Instead, take the number from Form 1098—which your bank sends you each year—that shows the actual taxes paid.

Trap #2: Line 6 – tax calculations for recent buyers and sellers

If you bought or sold a home in the middle of 2010, figuring out what to put on line 6 of your Schedule A Form is tricky.

Don’t simply enter the number from your property tax bill on line 6 as you would if you owned the house the whole year. If you bought or sold a house in midyear, you should instead use the property tax amount listed on your HUD-1 closing statement, says Phil Marti, a retired IRS official.

Here’s why: Generally, depending on the local tax cycle, either the seller gives the buyer money to pay the taxes when they come due or, if the seller has already paid taxes, the buyer reimburses the seller at closing. Those taxes are deductible that year, but won’t be reflected on your property tax bill.

Trap #3: Line 10 – properly deducting points

You can deduct points paid on a refinance, but not all at once, says David Sands, a CPA with Buchbinder Tunick & Co LLP. Rather, you deduct them over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you’re entitled to deduct only $100 per year on your Schedule A Form.

Trap #4: Line 10 – HELOC limits

If you took out a home equity line of credit (HELOC), you can generally deduct the interest on it only up to $100,000 of debt each year, says Matthew Lender, a CPA with EisnerLubin LLP.

For example, if you have a HELOC for $200,000, the bank will send you Form 1098 for interest paid on $200,000. But you can deduct only the interest paid on $100,000. If you just pull the number off Form 1098, you’ll deduct more than you’re entitled to.

Trap #5: line 13 – Private mortgage insurance

You can deduct PMI on your Schedule A Form, as long as you started paying the insurance after Dec. 31, 2006. (Also, this is also a good time to review your PMI: You might be able to cancel your PMI altogether because you’ve had a change in loan-to-value status.)

Trap #6: line 20 – casualty and theft losses

You can deduct part or all of losses caused by theft, vandalism, fire, or similar causes, as well as corrosive drywall, but the process isn’t always obvious or simple:

• Only deduct losses that are greater than 10% of your adjusted gross income (line 38 of Form 1040).

• Fill out Form 4684, which involves complex calculations for the cost basis and fair market value.  This form gives you the number you need for line 20.

Bottom line on line 20: If you’ve got extensive losses, it’s best to consult a tax pro. “I wouldn’t do it myself, and I’ve been dealing with taxes for 40 years,” says former IRS official Marti.

Barbara Eisner Bayer has written about personal finance for the past 17 years. She works hard to translate IRSese into plain English. She has unbounded respect for CPAs.

This year, instead of your tax filing being due on Friday, April 15, you’ll have a few extra days to complete and file your taxes. That means your tax filing isn’t due until Monday, April 18, 2011.

The three extra days have been added because of Emancipation Day, which is a little-known Washington, D.C. holiday that celebrates the freeing of slaves in the district. The holiday actually falls on Saturday, April 16 this year, but will officially be observed on Friday, April 15. As a result, the IRS pushed the filing deadline to Monday, April 18 – since the tax code states that filing deadlines can’t fall on Saturdays, Sundays or holidays.

Still Need More Time?

If you need more time to file your taxes, you can submit Form 4868 for a six-month extension. You can learn more about extensions on the IRS website.

Problems Paying?

But what do you do if you’ve completed your tax returns only to find out that you owe way more to Uncle Sam than you were expecting – or worse, that your tax bill is more than you can possibly afford to pay right now? Don’t worry. If this is the case, you’re not alone… especially in today’s economy. And, more importantly, you’re not going to jail just for being a little short on cash.

Rest assured, the IRS only seeks criminal charges for those who the agency can prove intentionally chose not to file and pay taxes. So, even if you can’t pay your bill right away, file your return on time, and not only will you stay off the IRS’s bad side, you’ll avoid some hefty financial penalties in the process.

Penalties and Interest Charges

According to the IRS, the penalty for filing late is generally 5% per month, or up to 25% of the total tax amount due. Not to mention interest charges, which the IRS changes quarterly, and which range between 4% and 9%. This interest applies to the unpaid balance, penalties, and to any interest that has been charged to the account as well.

If no effort is made to pay back-taxes, the IRS can impose stricter penalties, including levying bank accounts, wages, other income, or taking other assets like houses and cars. A Federal Tax Lien could also be filed, which could ruin your credit history for years to come.

The penalty for filing on time but paying late, however, is much lower. If you choose an installment plan to pay your debt, interest will accrue on the unpaid debt amount only. Therefore, when you file your return, pay as much as you can to help cut down the penalties.

Delayed Collection

If you absolutely cannot pay any part of your tax bill, the IRS may temporarily delay collection until your financial situation improves, although interest and penalties will accrue throughout this time. But this extension is reserved for what the IRS calls “significant hardship.” Your best bet is to talk to a CPA or tax professional if you cannot pay any part of your tax bill.

Whatever you do, DON’T just ignore the bill and assume the government will forget about it. Assess the situation, seek help from a tax professional, and make a plan to address the situation.

Stuart Brown, Sr. Loan Officer Team Leader

Note: At the risk of boring you with another post about mortgage interest deductions, this is such an important issue that I wanted to post these specific facts to help state the case for how vital the deduction is to homeowners and those pursuing homeownership.

In recent weeks, many proposals, suggesting a variety of changes to the tax system, have been discussed. The estimates below are for the complete elimination of these two tax benefits at current marginal tax rates, one of the most extreme possible changes.

Mortgage Interest Deduction Facts:

• 51 million—or 68 percent—of the approximately 75 million owner-occupied houses in the United States in 2009 had a mortgage.
• 38.5 million taxpayers claimed a deduction for mortgage interest, deducting a total of $470 billion, in 2008.
• The average taxpayer claiming the MID deducted $12,200 from taxable income in 2008.
• Therefore, the average taxpayer saved $3,050 in taxes by claiming the mortgage interest deduction¹ .
• The total tax savings from the MID in the United States in 2008 was $117 billion.

Real Estate Tax Deductions Facts:

• 42 million taxpayers in the United States claimed a deduction for real estate taxes in 2008, deducting a total of $172 billion.
• The average taxpayer claiming the real estate tax deduction subtracted $4,090 from taxable income in 2008.
• Therefore the average taxpayer saved $1,020 in taxes as a result of the real estate tax deduction² .
• The total savings from the real estate tax deduction in the United States in 2008 was $43 billion.

Eliminating Deductions: Losses for Home Owners and the Nation

If the mortgage interest and real estate tax deductions were eliminated, the loss would not be a one-year event; homeowners lose out on these potential savings each and every year. The present value³ of these lost savings could total $3.2 trillion. The value of all owner-occupied real estate in the United States in 2009 was $19.3 trillion⁴ . If the lost tax savings are fully capitalized into the price of houses, the average decline in value in the United States would be 17 percent. From the individual perspective, the median priced home in the United States in the third quarter 2010 was $177,800. A decline in value of 17 percent, as projected, would mean a loss in home value of $29,500 for the typical home owner.

These estimates, because they are based on a complete elimination of these deductions, can be viewed as a high-end estimate. Other changes will result in smaller losses to home owners. Additionally, national results are computed by looking at national averages. A very different picture can result when looking at the state level depending on the characteristics of the housing market, tax payers, and homeowners. For state information, contact data@realtors.org.

¹Marginal rates range from 10 to 35 percent. A 25 percent rate was used to calculate the tax savings.
²Ibid.
³Present value calculation assumes 5 percent discount rate and 1000 year time horizon.
⁴As measured by the American Community Survey. The Federal Reserve Flow of Funds for 2009 estimated the market value of household real estate to be $17 trillion which would raise the estimate of the decline in value to 19 percent.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

©2010 NATIONAL ASSOCIATION OF REALTORS®. All rights reserved.

You can receive a tax credit of 30% of the purchase price of qualified energy-efficient products, up to a maximum tax credit of $1,500. According the the IRS, “To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer’s main home in the United States.” The $1,500 maximum applies to to the total amount of credits claimed for the years 2009 and 2010 combined. That means your tax credits for energy-efficient improvements cannot exceed a total of $1,500 over both 2009 and 2010.

Improvements Restricted to ‘Main Home’
The tax credit for nonbusiness energy property is restricted to improvements to and appliances installed at a primary residence. Improvements made on rental homes, second homes, or vacation property are not eligible for this tax credit.

Examples of home improvements that could qualify as tax credits:

• Exterior doors and windows
• Storm windows
• Skylights
• Metal roofs
• Insulation
• Central air conditioning and heating
• Geothermal heat pumps
• Hot water boilers
• Advanced main air circulating fans
• Biomass fuel stoves with a thermal efficiency rating of 75% or more
• Asphalt roofs with cooling granules

Courtesy of Jim Ogan. Contact 503-740-3453 or jogan@firstam.com

A 1031 exchange is a great tool for investors who want to avoid paying tax on the gain from the sale of real estate; however, in order to completely defer the tax, an investor must 1) find one or more “like-kind” replacement properties with a total fair market value that equals or exceeds what is being sold, 2) invest all the cash from the existing property (“relinquished property”) in the new property; and 3) acquire debt on the replacement property equal to or greater than the debt on the relinquished property, unless cash is added to offset the debt.

Many experienced real estate investors who are familiar with 1031 exchanges don’t realize that a build-to-suit exchange can give them more flexibility in structuring their transactions to meet these requirements and more ability to take advantage of opportunities in today’s market.

The build-to-suit exchange allows an owner to use the proceeds from the sale of the relinquished property not only to acquire replacement property, but also to make improvements to the property. For example, in a typical forward exchange, if an investor sells relinquished property with a fair market value of $800,000, debt of $200,000 and equity of $600,000, he must acquire a property equal to at least $800,000 and must invest at least $600,000 into that property. In a build-to-suit exchange, however, the investor could acquire property worth only $200,000 and have $600,000 in improvements made to the property by using the remaining $400,000 in exchange proceeds and by borrowing $200,000. This would use up the remaining cash and increase the fair market value of the replacement property to $800,000, resulting in a fully tax deferred exchange. A build-to-suit exchange can be a great tool in this market for investors looking to buy and improve distressed assets; however, investors should consult with their legal/tax advisors to ensure that they properly structure their transaction.

Structuring a Build-to-Suit Exchange

A build-to-suit exchange is accomplished by having a holding entity (called an “exchange accommodation titleholder” or “EAT”) temporarily hold title to the replacement property while the improvements are being made. The EAT is typically a limited liability company owned by a qualified intermediary. The EAT is necessary because any work done to the property after the investor takes title to it is not considered like kind property and therefore will not increase the value of the property for exchange purposes.

A build-to-suit exchange can be structured either as a deferred exchange where the existing property is sold before the new property is acquired, or a reverse build-to-suit, where the new property is acquired first. In either case, the entire transaction must be completed within 180 days. To learn about the benefits and drawbacks of a build-to-suit exchange, read on.

Brought to you by: Jim Ogan of First American Exchange Company. Contact Jim @ 503-740-3453 jogan@firstam.com

Installment Sale Essencials

An installment sale is a sale where the seller receives at least one payment after the tax year in which the sale occurs.  For example, an investor who is selling property for $5 million in 2010 receives $1 million in cash at the closing and a note from the buyer agreeing to pay the remaining $4 million over the next four years, plus interest at the rate of 6% per annum.

The two main advantages of an installment sale is that it may facilitate a sale if the buyer cannot find third party financing, and it allows the seller to defer paying tax on a portion of the gain because the gain is spread out over the term of the installment note.  There are a few important things to remember when structuring an installment sale transaction.

What is taxed and how is it taxed?

The interest portion is taxed as ordinary income.  Even if the note does not provide for interest, the tax laws may re-characterize some of the payments as interest.

The gain from appreciation of the property is spread out over the term of the installment note.  There is a formula for computing which portion of each payment is considered gain, and you will need to pay tax on that portion of each payment at the applicable capital gains tax rate.

How is recapture of depreciation taxed?

When selling property, in addition to owing tax on the gain due to appreciation in the value of the property, taxpayers must pay tax on the “recapture of depreciation.”  If the investor has taken depreciation deductions (or could have taken them), he pays tax on these deductions when he sells the property.  All taxes on recapture of depreciation are due in the year of sale and cannot be deferred using an installment note.  For some taxpayers in the current market, this is an important point to remember, because they may have as much recapture of depreciation gain as gain due to appreciation.  For those taxpayers, an installment sale can only defer some of the gain (although a 1031 exchange could defer all gain if structured properly).

When I start an exchange in one tax year and complete it in the next, can I get installment sale treatment on any excess funds?

Some exchanges start in one tax year and are completed (or fail) in the next tax year.  If there is excess cash after the completion of the exchange, the taxpayer won’t owe tax on that cash until he has a right to receive it.  For example, assume an investor sells his relinquished property on November 30, 2010, and indentifies and closes on the acquisition of replacement property early in 2011.  Although the investor uses up some of his exchange funds, he has excess funds that are not used in the exchange and he receives those funds in 2011.  Although his transaction will be partially taxable, the tax attributable to the cash received in 2011 is considered 2011 income and will not be due until 2012, when he files his 2011 tax return.

Can I elect to pay all of the tax in the year of closing rather than over time?

Yes.  It is possible to elect to pay all of the tax in the year of closing, even if some payments will be received in future years.  To make this election,

• you must report the sale on Schedule D of Form 1040 and/or Form 4797, rather than the Installment Sale Form 6252,
• you must make this election by the due date, including extensions, for filing your tax return, and
• if you file your tax return without making this election, you can still make the election by filing an amended return within six months of the due date.

Once you make the election to be taxed in the year of closing, you will owe tax on all of the gain, even that gain that is attributable to payments you will receive in the future, and you cannot easily change your election so that you are taxed over time using the installment method.  Once you elect to treat the transaction as taxable in the year of sale, you can revoke your election and go back to installment sale treatment only with IRS approval.

Where can I learn more about installment sales?

The Internal Revenue Service Publication 537 Installment Sales covers all of these issues.  For more information on combining installment sales and 1031 exchanges, please contact Jim Ogan at 503-740-3453 or jogan@firstam.com.

Brought to you by: Jim Ogan of First American Exchange Company. Contact Jim @ 503-740-3453 jogan@firstam.com

Increased Taxes

There has been a lot of bad news the last couple of years and the latest round of bad news warns of higher taxes on the horizon. For example, the law that lowered the capital gains tax rate to 15% has a sunset date and is scheduled to expire this year, which will result in a maximum capital gains tax rate of 20% in 2011. This will happen automatically without any action on the part of Congress. Starting in 2013, there will be a new tax of 3.8% on unearned income, which includes income from the sale of real estate, imposed on taxpayers who earn more than $200,000 ($250,000 for married couples filing jointly). This tax was part of the health care bill and essentially raises the federal capital gains rate for high income earners to a maximum rate of 23.8%. On the partnership front, there has been a proposal to tax carried interest at ordinary income tax rates rather than capital gain tax rates, and although this proposal has been temporarily shelved, many people believe that the idea is not dead and may come back later this year or next year. In addition to all of these federal tax changes and proposals, many states are looking for cash and proposing to increase income and property tax rates.

Increased Activity

For some real estate investors, agents and brokers, there is a silver lining to this cloud, as the anticipated increase in taxes should result in an immediate increase in activity in the marketplace. The possibility of tax increases starting in 2011 may encourage investors to sell their properties and cash out in 2010 because, as taxes increase, investors know that they have to sell their properties for a higher sale price in order to have the same level of profits. If property values don’t rise at the same rate as taxes, these profits are better taken now than several years from now. Although this activity may not increase the number of 1031 exchanges this year, it should increase the number of transactions between now and the end of the year.

The increase in activity that is spurred on by increased taxes should continue in 2011 because the consensus is that taxes will go up even further as Congress begins to feel that the economy is improving. Particularly in 2011, these factors should also encourage more investors to do 1031 exchanges. If structured properly, in most cases a 1031 exchange will allow an investor to defer all federal capital gains and state capital gains taxes indefinitely while using the savings to acquire more property.

As baby boomers are approaching retirement age and considering cashing out, 2010 is an opportune time. Other investors who are ready to trade up or diversify and have adequate cash for a substantial down payment may want to take advantage of low interest rates and exchange into a new property. In an era of bad news, there are opportunities for those who know where to look for them.

To attend a free 1031 Exchange Webinar, go here.