rent

Important Facts About the New Laws on Mortgage Interest Tax Deduction

If you are one of the millions of Americans who own your own home, you should be thinking about how President Trump’s latest tax bill helps or dents your finances; particularly when it comes to the ever-popular mortgage interest deductions. This article should put you ahead of the subject.

First off, if you are a homeowner with no intentions of changing anything soon, your mortgage deductions are unaffected (with a couple of exceptions we deal with below).

The new laws apply only to those buying a home after 15th December 2017. If you fall into this category it boils down to understanding 3 key items:

  • There’s a cap of $750,000 (previously $1 million) on your total mortgage value (covering private and secondary homes in aggregate) that qualifies for interest deduction.
  • Discussing interest rate deduction on new home purchase goes hand-in-hand with the cap placed on Property Tax Deduction – now set at $10,000 (previously unlimited).
  • The Standard Deduction has been nearly doubled for all categories of tax filers in 2018 onward.

Logically, anyone who intends buying in expensive locations or/and locations with property taxes above $10,000 should stop to think about it:

  • High property prices of course generally call for higher mortgage financing, And it often happens that premium locations are also the ones with the highest real estate taxes – a double whammy effect if you will.
  • In situations like this, it seems that the traditional enthusiasm around interest rate deductions may become somewhat jaded. It gives a whole new meaning to the popular realtor’s mantra, “location, location, location!”

The one escape hatch is to simply forget about itemizing interest payment and property tax claims; go to the expanded Standard Deduction now provided. But then again, the apparently increased relief offered by this new provision should be viewed alongside the knowledge that individual personal exemptions have been removed – which brings family size into the equation. If you have a lot of dependents (e.g. children or elderly parents) you may find yourself after all is said and done unchanged – or worse still, going backward.

Here’s another curveball that throws the cat amongst the pigeons: irrespective of when you bought or intend to buy your home/ homes (i.e. before or after the December 2017 law, it’s all the same) interest on second mortgages and on mortgages attached to unrented vacation residences is no longer deductible. Period. Given this, and all the other considerations are drawn into the conversation (as outlined above), it is impossible to provide a quick “catch-all” solution on interest rate deductibility. We can say this, however:

  • It is likely there’ll be a homebuyer movement away from expensive property purchases for the foreseeable future, resulting in a growing tendency to relocate to tax-friendlier regions.
  • The upper-middle class homebuyers will need to analyze these new tax provisions with a fine toothcomb, and even consider renting out vacation homes for part of the year to bring interest rate deduction back into the equation.
  • Those buying at home prices under the $750,000 cap limit with under-$10,000 property tax limits should have a far easier passage.

Conclusion: It’s at times like this that astute tax advice paves the way forward and dispels doubt. As you can see there are numerous considerations, especially for larger families and those fortunate enough to own more than one home. Also, those on the cusp of relocating should be looking at all the variables as well as state taxes before making the move. Our team is geared to answer your questions on every aspect of real estate related deductions. Contacting us sooner than later may be the wisest decision you can make this year.

Renting Residential Real Estat – A Tax Review for the Nonprofessional Landlord

Investing in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.

Rental Losses

Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.

$25,000 Loss Limitation

The tax law generally treats real estate rental losses as “passive” and therefore available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual holds at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.

What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.

Selling the Property

A gain realized on the sale of residential rental property held for investment is generally taxed as a capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.

Exclusion of Gain

The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.

After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.

This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.

Smart Pricing Strategies

It’s a given that businesses need to be profitable to survive. A key element in making a profit is pricing. Here are some suggestions that can help you get your pricing right.

Identify Your Costs

If you don’t know what your product’s or service’s total costs are, you can’t price them accurately. What makes up the total cost? The components may include:

  • Cost of materials or merchandise
  • Labor costs, including salaries plus benefits
  • Overhead costs, such as taxes, rent, insurance, marketing, utilities, and transportation

Determining how much you need to charge just to cover your costs is an essential first step in setting prices. Be sure to reevaluate your costs regularly. If you are experiencing difficulty moving certain products at an acceptable profit, your costs could be too high.

Know Your Customers

Customers generally fall into distinct categories. Some are very price sensitive. Others focus less on price and more on convenience. The implied status or exclusivity of certain goods and services is very important to certain other customers. Once you identify the type of customer you are targeting, it becomes easier to set your prices accordingly. One way through which you can gain their trust is by showing them you protect their privacy, as I recently read on Salesforce that, information protection is one of the highly valued and relevant factors to which customers pay a close detail.

Know Your Competitors

Knowing what your competitors charge for similar products or services helps you position your business in the marketplace. For example, if you determine your competitors focus on low prices, you can decide if you want to differentiate your business by focusing on superior service.

Leveraging service as a value proposition may justify charging higher prices than your competition. Or there may be other differentiators that allow you to charge higher prices, such as exclusive merchandise or highly knowledgeable employees.

Experiment and Monitor

Look for ways you can sell options, service contracts, and add-ons to a primary product or service, perhaps by offering several “packages” at different prices. Or consider applying discounts based on the quantity ordered.

Continuously monitor your prices and your profitability. Knowing which products or services are making you money allows you to make data-driven decisions about inventory and pricing.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Starting a Business Are Startup Costs Deductible?

There can be no more exciting a time than to go from punching a clock to being your own boss. But starting a business means more than deductible lunch dates and setting your own hours. If you think self-employment means you get to kick back and relax, it won’t happen. Most entrepreneurs will tell you they have never worked harder.

Starting a new business takes time and money. If you do nothing else, begin with a business plan. Your investment of blood, sweat, and tears can pay off for the life of your business—as long as you make prudent choices, and a business plan will help you calculate what you’ll need and how much it will cost.

The money you invest is tax deductible, right?

Well … not always.

Don’t make the mistake of assuming all your startup costs are deductible. As long as your total startup costs are $50,000 or less, the IRS allows you to deduct a limited amount of startup costs, and also organizational costs.

On the other hand, if your startup costs for either area exceed $50,000, your allowable deductions are reduced by that dollar amount. Once you make your first sale, however, you can claim all of your business startup expenses. Read on for details.

What Are Startup Expenses?

These days no business can operate without using some form of technology. Unless you plan to use your 3-year-old laptop to run your online business, you’re going to need to purchase equipment to help facilitate your business. Oh, and you’ll need a smartphone if you want to keep up.

Of course, computers and office equipment would qualify as startup expenses. If you need to rent office space or even a cubicle in a cooperative setting, they would also qualify. However, shelf any plans to stand by the mailbox waiting for your hefty check from the IRS. Neither of these expenses can be deducted until after your first sale, at which time they will be deducted over a period of 15 years.

The Upside?

You can choose to deduct the first $5,000 in your first year of business for startup costs, and another $5,000 for organizational costs. Expenses such as legal fees, corporate filing, DBA, and related expenses fall under this designation, but only if your total startup costs are $50,000 or less. If your expenses were over $55,000 you lose the right to any deduction at all.

Make sure you save all receipts for purchases. The laws change so it’s in your best interest to be aware. Check with your tax professional, who will be aware of the latest IRS tax laws. He or she will advise as to whether your startup expenses qualify for a deduction.

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Home-Based Business Mixing Business with Pleasure At Tax Time

Want the attention of the IRS? All you have to do is make personal transactions on your business account. RED FLAG!

It’s called comingling funds, and it can get you into big trouble at tax time.

No, pleading ignorance will not save you.

What’s The Difference?

Expenses associated with personal products or services, living expenses or family expenses are not business expenses and generally non-deductable. Buying a new TV, even if you watch a program or two focused on your industry, is no more a business expense than taking Grandma to dinner.

However, if you have expenses that are partly personal and partly business, as long as you divide the total cost appropriately, the IRS permits deduction of the business portion. Doable, yes, but keep in mind this complicates things during tax season.

For example, let’s say you use your credit card to borrow money. You spend 90 percent of it buying a new office phone system and the other 10 percent for a cordless home phone. The 90 percent used for business is deductible. The remaining 10 percent is a personal expense must be divided out. It’s not deductible.

Home-Based Business Expenses

Here is another potentially sticky spot if you try to fudge.

Do you work from home? Many people do these days. It makes good sense, and not only for entrepreneurs. Many corporations allow employees to sign onto their computers and work from home. The company saves money and ultimately, employees can be more productive in a home setting.

It gets sticky when home-based business owners try to claim all of their home expenses and utilities and file for business deductions on the lump sum.

The IRS sees RED.

It’s best not to comingle funds, but if you find yourself needing to make separate calculations for personal and business expenses from the same account, accuracy is paramount, i.e. don’t make mistakes.

There are two options for home-based businesses at tax time. Which one is right for you?

Regular Method

When using the regular method to calculate expenses, home office deductions will be based on the percentage of your home devoted to business use. Whether you use a part of a room or the whole second floor of your home for conducting business, figure out the percentage of that space and related expenses to determine deductions.

Simplified Option

There’s also a simplified option that makes things easier for many small business owners. It was designed to cut out some of the burdens of tedious recordkeeping associated with the regular method.

In lieu of calculating and dividing expenses, the simplified method allows qualified taxpayers to multiply a prescribed rate by the allowable square footage of the business space.

Mixing Business with Pleasure

Be aware that mixing personal expenses in with business expenses by running them through your business will likely NOT go unnoticed. You won’t be the first to try and the IRS is paying attention.

Never use your business account for personal purposes, and if you do, don’t claim those expenses on your taxes. Home rent, pet care, and other personal expenses are blatantly disallowed.

What surprises many new business owners is that clothing (yes, even though you get dressed for meetings) and groceries are not deductible. Don’t even try.

Certain items, such as gifts and entertainment, may be allowable if they are business expenses. Hold onto receipts and keep good records. Always talk to your tax professional to be sure.

You can avoid a red flag by keeping business and personal accounts separate. Right. Two different accounts. This will minimize issues at tax time, and help you avoid an IRS audit.

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Understanding the Tax Ramifications of Investing in Rental Real Estate

Investing in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.

Rental Losses

Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.

$25,000 Loss Limitation

The tax law generally treats real estate rental losses as “passive” and therefore available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual holds at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.

What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fidesense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.

Selling the Property

The gain realized on the sale of residential rental property held for investment is generally taxed as a capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies. Find out how to find property managers in Aventura and to protect your investment and valued property.

Exclusion of Gain

The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.

After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, the gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.

This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

What You Need to Know Before You Rent Your Vacation Home

Renting out a second home can help defray the cost of owning and maintaining the property. And there may be valuable tax benefits from the rental arrangement as well. Here are some things to think about if you are going to rent out a vacation property.

 

Two Week Rule

 

Your rental income won’t be taxable as long as you limit the number of rental days to 14 or fewer each year. In this situation, you won’t be able to deduct your rental expenses (other than property taxes and qualifying mortgage interest).

 

More Than 14 Rental Days

 

Once you exceed 14 rental days, all rental income becomes taxable to you. But you may deduct various rental expenses. There are different limits on rental deductions depending on your personal use of the home.

 

  • All expenses associated with renting out the property, such as utilities and maintenance, are potentially deductible if you limit personal use of the home to no more than the greater of (1) 10% of the total number of days the home is rented or (2) 14 days. However, if there’s a rental loss, the tax law’s passive activity rules may limit your loss deduction.

 

  • Where personal use exceeds the 10% or 14-day threshold, your tax deductions for rental expenses generally will be limited to the amount of rental income you collect. No loss is allowed.

 

To learn more about vacation homes and taxes, give us a call today. Our knowledgeable and trained staff is here to help.

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

Does the Sale of Your Home Qualify for a Federal Income Tax Exclusion?

You’ve sold your home and made a nice profit on the sale. So you may be wondering if Uncle Sam is entitled to a cut. Although gain on a home sale is potentially taxable, you may qualify for a federal income-tax exclusion.

The Rules in General

If you’re a single taxpayer, you may qualify to exclude gain of up to $250,000 if you owned the home and used it as your principal residence for at least two of the five years before the sale. Married couples who file jointly may exclude up to $500,000 of gain as long as one spouse owned the home — and both spouses used the home as a principal residence — for two of the last five years.

The Frequency Factor

The exclusion is generally available to sellers only once during a two-year period. A married couple is entitled to the $500,000 exclusion only if neither partner used the exclusion within the two-year period that ended on the sale date.

Reduced But Available

Even if you don’t meet the criteria described above, you may still qualify for a reduced exclusion (of less than $250,000 or $500,000) if the primary reason for the home sale was a change in the location of your employment, a health condition, or certain other “unforeseen” circumstances. The affected individual can be you, your spouse, a co-owner of the residence, or a person sharing your household. You may also qualify for the reduced exclusion if you sell your home to care for a sick family member.

Additional restrictions on gain exclusion may apply if you’ve rented out your home, maintained a home office, or turned a second home into a principal residence.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

Alimony and the IRS – What You Need to Know

If you and your spouse are ending your marriage, you’ll have many decisions to make. You will have to divide your belongings in a fair and equitable way. If you have children, you’ll have to work out custody arrangements. You may even have to decide who keeps the cat or the dog.

Another important decision you’ll face is whether alimony payments will be part of your divorce decree. This decision can have significant tax consequences for both of you. The IRS rules regarding alimony payments are complex. Before your divorce agreement becomes final, both you and your spouse should understand the tax implications of your arrangement.

The Rules

Alimony payments are tax deductible by the person who pays them and are considered taxable income to the recipient. However, to be tax deductible, alimony payments must meet certain requirements. For one thing, payments can’t be voluntary — they must be required by your divorce or separation agreement. Payments must also be in cash. You can’t, for example, do yard work or buy your ex a new TV and have that count as alimony, although you can agree to cover a specific expense such as the rent or mortgage.

You and your former spouse must be living apart for payments to qualify as alimony. And payments must stop if the recipient dies. If payments are to continue, none of the payments — even those made while the recipient is living — are deductible. However, if alimony payments stop because your ex-remarries, their deductibility is not affected.

Child Support Is Different

Unlike alimony payments, payments made for child support are not tax deductible by the person paying them, nor are they considered taxable income to the person who receives them. If alimony payments will decrease once a child reaches a certain age, the differential is treated as nondeductible child support.

Your tax situation and that of your spouse may affect your decision to designate payments as tax-deductible alimony or nondeductible child support. Our tax advisors can offer you the guidance you need, so give us a call today.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

Are There Advantages to Owning a Second Home?

Whatever the location, size, or value of a second home, certain tax advantages are built in. However, your opportunity to benefit from them depends on how you use the property.

Personal Use

Both property taxes and mortgage interest are as deductible for a second home as they are for your primary residence — and are subject to the same limitations. If you file a joint return, you cannot deduct interest on more than $1 million of acquisition debt ($500,000 for married persons filing separately) on one or two homes.

Two tax advantages of home ownership are not available for a second home — the immediate deduction of mortgage points when purchasing and the capital gain exemption when selling. Both tax breaks require the home to be your “principal residence.” However, you can deduct the points on your second home’s mortgage over the loan’s term.

Rental Use

More tax advantages become available if you forgo some of your personal use in favor of renting out your second home for part of the year. But there may be drawbacks as well.

If you rent out your home for 14 or fewer days during the year, you do not have to report rental income on your tax return, regardless of the amount, and there is no effect on your mortgage interest deduction. But you cannot deduct any rental expenses.

If you rent out your property for more than 14 days during the year, all rental income becomes taxable from day one. However, rental-related ownership expenses — including depreciation, maintenance, and utilities — become tax deductible. Your personal use of the second home affects the deductible amount. When personal use is more than 14 days (or 10% of the number of days your home is rented, whichever is greater), the maximum deduction is 100% of the rental income. Note that allowing relatives to use your vacation home usually counts as personal use, regardless of how much they pay for the privilege. And, if a friend rents your home for less than the fair market rate, that also counts as personal use.

If your vacation home qualifies as a rental property (i.e., personal use doesn’t exceed the allowable limits), a deduction is allowed only for mortgage interest allocated to rental use. That could be important. If you were to rent your second home during July only, for example, then only 1/12 of your interest expense would be deductible.

Deducting Losses

What if your rental expenses exceed the rent you collect? Only an “active” investor can deduct rental losses. If you actively participate in managing the rentals and maintaining the property, you can apply up to $25,000 of losses each year against your regular income. This loss deduction is phased out for taxpayers with adjusted gross income between $100,000 and $150,000. But, if you hire a manager, you become a passive investor and can use rental expenses to offset only rental income. However, you can carry any excess deductions forward to future tax years.

Your use determines the tax treatment of a second home. Before you decide to rent your second home for more than 14 days a year, carefully weigh the benefits and disadvantages.

Deductible Yacht and Motor Home Financing

Your second home doesn’t have to sit on a fixed foundation to qualify for tax advantages.

According to the IRS, a facility qualifies as a residence if it has sleeping, cooking, and bathroom accommodations. Therefore, your yacht or smaller boat can be a second home. So can a motorhome of any size or value.

Provided the boat or motorhome secures the purchase loan, your mortgage interest is as deductible as it would be on a more conventional second home. The same $1 million limit on total debt to buy or improve your residences also applies.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

Investors Choice Lending can help providing a long-term loan. It is a good opportunity to get hard money financing.