One of Your Biggest Investments is Your Home
Your home is probably one of your largest investments, which means you must always manage your property with its tax liability in mind. Your investment in a vacation or principal residence can be a welcomed asset when calculating your year’s tax liability. Take a look at these six simple tax saving tips.
1. Use an installment sale of real estate to defer a tax bill. If the buyer pays you in installments, the IRS will let you pay the tax bill on your profit in installments, too. You must charge interest on the deal and each payment you receive will have three parts: interest (taxable at your top rate), capital gain (taxed at a maximum of 20% in 2013) and return of your investment (tax-free).
2. Convert a vacation home to your principal residence. Until 2009, there was a sweet tax break for folks who sold their homes, claimed tax-free profit and then moved into a vacation property. After they lived in that home for two years, they could sell and claim tax-free profit again . . . including appreciation from the days the place was a vacation home. There can still be some real tax benefits to this strategy, but the value has fallen. A portion of any profit on the sale of a vacation-home-turned-principal-residence will not qualify as tax-free home-sale profit. The taxable portion will be based on the ratio of the time after 2008 the property was used as a vacation home to the total period of ownership.
3. Take advantage of tax-free rental income. You may not think of yourself as a landlord, but if you live in an area that hosts an event that draws a crowd (a Super Bowl, say, or the presidential inauguration), renting out your home temporarily could make you a bundle — tax-free — while getting you out of town when tourists overrun the place. A special provision in the law lets you rent a home for up to 14 days a year without having to report a dime of the money you receive as income.
4. Home buyer’s Bible. Be a packrat with paperwork. Some costs associated with buying a new home affect your “tax basis,” the amount from which you’ll figure your profit when you sell; others can be deducted in the year of the purchase, including any points you pay (or the seller pays for you) to get a mortgage and any property taxes paid by the seller in advance for time you actually own the home.
5. Don’t buy a tax bill. Before you invest in a mutual fund near the end of the year, check to see when the fund will distribute dividends. On that day, the value of shares will fall by the amount paid out. Buy just before the payout and the dividend will effectively rebate part of your purchase price, but you’ll owe tax on the amount. Buy after the payout and you’ll get a lower price, and no tax bill.
6. Check the calendar before you sell. You must own an investment for more than one year for profit to qualify as a long-term gain and enjoy preferential tax rates. The “holding period” starts on the day after you buy a stock, mutual fund, or other asset and ends on the day you sell it.
All in all, the tax liability from your real estate holdings may sound overwhelming, but garvey & garvey, llc CPAs can easily assist business owners and home owners with establishing a method that is appropriate for them so that there are no unwelcome surprises when the tax year ends.