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Top Ten Tax Deductions for Owning Your Home

Not just a shelter from the elements, your home also serves as a valuable tax shelter.

Your home provides many tax benefits -- from the time you buy it right on through when you decide to sell. Here's a summary of the tax benefits of home ownership; for details, visit the IRS website at www.irs.gov.

1. Mortgage Interest
2. Points
3. Equity Loan Interest
4. Home Improvement Loan Interest
5. Property Taxes
6. Home Office Deductions
7. Selling Costs and Capital Improvements
8. Capital Gains Exclusions
9. Moving Costs
10. Mortgage Tax Credit

1031 Exchanges
How 1031 Exchanges Work
Benefits of a 1031 Exchange
IRS Code

If you're filing jointly, you can deduct all your interest payments on a maximum of
$1 million in mortgage debt secured by a first and second home. The maximums are halved for married taxpayers filing separately.

You can't use the $1 million deduction if you pay cash for your home and later use
it as collateral for an equity loan.

Learn more from IRS Publication 936, Home Mortgage Interest Deduction, available
at www.irs.gov.
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Your mortgage lender will charge you a variety of fees, one of which is called "points." A point is calculated at 1% of the loan principal. One to three points are common on home loans, which can easily add up to thousands of dollars. You can fully deduct points associated with a home purchase mortgage. You cannot deduct a mortgage broker's commission.

Refinanced mortgage points are also deductible, provided they are amortized over the life of the loan. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.
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You may be able to deduct some of the interest you pay on a home equity loan or
line of credit. However, the IRS places a limit on the amount of debt you can treat
as "home equity" for this deduction. Your total is limited to the smaller of:

• $100,000 (or $50,000 for each member of a married couple if they file separately),


• the total of your home's fair market value -- that is, what you would get for your
  house on the open market -- less certain other outstanding debts against it.
The IRS rules about the home equity loan interest deduction are complicated. IRS Publication 936, Home Mortgage Interest Deduction, available at www.irs.gov, explains the details.
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If you take out a loan to make substantial home improvements, you can deduct the interest on this loan. There is no dollar limit on this deduction. However, the work must be a "capital improvement" rather than ordinary repairs.

Qualifying capital improvements are those that increase your home's value, prolong its life, or adapt it to new uses. For example, qualifying improvements might include adding a fence, driveway, new room, swimming pool, garage, porch or deck, new built-in appliances, insulation, new heating/cooling systems, a new roof, landscaping, and the like. (Do keep in mind that capital improvements that increase the square footage of your home could trigger a reassessment and higher property taxes.)

Work that doesn't qualify you for an interest deduction includes such repairs as repainting, plastering, wallpapering, replacing broken or cracked tiles, patching your roof, repairing broken windows, and fixing minor leaks. Wait until you are about to sell your home to gain tax benefits from repair work. (See Selling Costs and Capital Improvements, below.) However, you can use a home equity loan, up to the limits discussed above, to make repairs and deduct the interest.
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Often referred to as "real estate taxes," property taxes are fully deductible from
your income. You can't deduct escrow money held for property taxes until the money is actually used to pay your property taxes.

A city or state property tax refund reduces your federal deduction by a like amount.
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If you use a portion of your home exclusively for business purposes, you may be
able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation. For details about this tax break, see Home Business Tax Deductions: Keep What You Earn, by Stephen Fishman (Nolo).
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If you decide to sell your home, you'll be able to reduce your taxable capital gain
by the amount of your selling costs.

Real estate broker's commissions, title insurance, legal fees, advertising costs, administrative costs, and inspection fees are all considered selling costs. In addition, the IRS recognizes that costs ordinarily attributed to decorating or repairs -- painting, wallpapering, planting flowers, maintenance, and the like -- are also selling costs if you complete them within 90 days of your sale and with the intention of making the home more saleable.

All selling costs are deducted from your gain. Your gain is your home's selling price, minus deductible closing costs, minus selling costs, minus your tax basis in the property. Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.
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This is a true tax shelter for those who are treating home buying as an investment. Thanks to the Taxpayer Relief Act of 1997, many home sellers no longer suffer a taxable gain. Married taxpayers who file jointly now get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single folks and married taxpayers who file separately get to keep up to $250,000 apiece tax free -- including single people who own a home jointly.

(For more information, see Tax Breaks for Selling Your Home.)
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If you move because you got a new job, you may be able to deduct some of your moving costs. To qualify for these deductions you must meet all of the following requirements, which get more and more complicated as you read on:
• You must move within one year of starting your new job.
• Your new job must be at least 50 miles farther from your old home than your old
  job was.
• The distance between your new home and new job can't be greater than between
  your new home and new job -- in other words, you can't have created a situation where your commute is longer than if you'd stayed put. (An exception, however, is made if your new commute will, in practice, save you time or money, or if your employer insisted on the move as a condition of your employment.)
• You must work full-time at the new workplace for 39 of the 52 weeks following the
  move. If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and a total of 78 weeks during the first 24 months after arriving at the new job location.
Deductions include travel or transportation costs, expenses for lodging, and fees for storing your household goods.
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A home-buying program called mortgage credit certificate (MCC) allows low-income, first-time homebuyers to benefit from a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home (the amount of the credit varies
by jurisdiction). You must first apply to your state or local government for an actual certificate.

This credit is available each year you keep the loan and live in the house purchased with the certificate. The credit is subtracted, dollar for dollar, from the income tax owed. (You do the calculations on IRS Form 8396, and submit this with your Form 1040.)

For example, if you paid $10,000 in interest, your tax credit would be $2,000. If you make, say $20,000 per year and owe $2,000 in income taxes without the credit, you would end up owing nothing to the IRS after the credit was applied. You would take the remaining 80% of the interest -- $8,000 -- as a mortgage interest deduction.

For more information on tax laws involving real estate transactions, visit
the IRS website at www.irs.gov. You will find much useful information, including basic information for first-time homeowners (IRS Publication 530) and publications about selling your house (IRS Publication 523), business use of your home (Publication 587), moving expenses (Publication 521),
and home mortgage interest deductions (Publication 936).
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Sell your Investment Property and defer capital gain taxes.

In a typical tax deferred exchange, there are four parties involved:
Taxpayer (exchangor): Has the property and would like to exchange it for a new one.
Seller: Owns the property that Taxpayer wants to acquire.
Buyer: Person with the cash who wants to acquire the taxpayer’s property.
Intermediary: Plays a role in almost all exchanges today buying and reselling the properties in return for a fee.
A tax professional can assure that the taxpayer or exchanger receives all of the benefits of Section 1031.

In order for the exchange to be tax deferred, any substitute property must have a fair market value greater than the relinquished property. In addition, all of the taxpayer’s equity or more must be used in acquiring the replacement property.

There are various ways to structure a 1031 exchange, ranging from the straightforward to deals which are much more complicated. Here are the more common methods:
Two-Party Exchange
The purest kind of exchange and also the most uncommon. Usually, the seller of the replacement property is not the buyer of the tax payer’s property. Here there is a simultaneous exchange in which only two parties are involved. Title to the relinquished property is conveyed by the taxpayer to the seller and title to the replacement property is conveyed by the seller to the taxpayer.
ABC Exchange
Also known as an Alderson Exchange. In this scenario, the buyer purchases the replacement property from the seller and then exchanges it with the taxpayer for the relinquished property. The buyer pays cash to the seller for the replacing property and title is transferred to the buyer. The buyer then transfers title to the replacement property to the taxpayer, who transfers title of the relinquished property to the buyer.
ACB Exchange
Also known as a Baird exchange. In this scenario, the taxpayer and the seller exchange properties. The seller (with title to the relinquished property) sells the property to the buyer for cash. As a result, the transfer tax consequences are diminished by having the double title transfer on the relinquished property,
which has a lesser value.
Direct Deeding
Sometimes referred to as a “pot exchange.” Direct deeding usually requires a single escrow or a single closing agent. The taxpayer transfers title to the relinquished property to the buyer. The buyer then pays cash to the seller and the seller transfers title to the replacement property to the taxpayer.
Simultaneous Exchange with Intermediary
This is when the buyer or seller is not willing to act as an accommodation party and buy the replacement property if the exchange falls through. This party transfers title to the replacement property to
the taxpayer.

A 1031 exchange, allows you to sell investment property and to defer capital gains and depreciation recapture taxes. This assumes reinvestment of 100% of the equity into "like-kind" property of equal or greater value. Any property held for investment purposes or for productive use in a trade or business generally qualifies as "like kind" property for 1031 exchange purposes.

1031 exchange rules require an investor to identify up to three potential "replacement" investment properties within 45 days of the close of escrow on their relinquished property. The acquisition of the replacement investment property (or properties) must be successfully completed within 180 days of close of the relinquished property.

Sole Ownership of Net-Leased Property
Many burned-out landlords are seeking the benefits of secure passive income provided by single tenant net-leased. There is a national shift away from management intensive real estate to properties that provide secure monthly income without landlord responsibilities.

Tenant-In-Common (TIC) Property
An alternative to sole ownership of real estate is an investment in the fractional ownership of a property. This form of ownership is known as tenants-in-common (TIC) or co-tenancy. In their 1031 exchange, many investors benefit from buying investment property as Tenants In Common (TIC) because it completes their exchange and can be closed in a timely manner due to pre-arranged financing. A TIC replacement property enables the average investor participate in the ownership of institutional type real estate with a minimum amount of investment dollars. Each co-owner receives their own deed and enjoys the same rights as a sole owner.

Investing in a TIC exchange property can provide secure monthly income, stability, and appreciation, without the management burden.

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A 1031 tax-deferred exchange offers strong benefits that translate into investment savings.

1. Defer Taxes
A 1031 exchange enables you to defer capital gains and depreciation recapture taxes. You can also harvest dormant equity at predictable time intervals with a 1031 exchange to maximize the inherent benefits of your real estate investments.

2. Potentially Increase Cash Flow
The tax dollars saved may be maximized to increase cash flow and overall net worth. The compounding effects of leveraging the equity in investment property over several holding periods can potentially produce higher actual dollar returns, new depreciation schedules to tax shelter cash flow, and accelerate equity accumulation.

3. Eliminate Day-to-day Property Management
1031 exchanges structured as Tenants In Common interest ownership provide real estate investors a range of opportunities to meet personal investment objectives. This includes property type and geographic diversification, and, most importantly, the elimination of day-to-day property management obligations.
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§ 1031. Exchange of property held for productive use or investment

(a) Nonrecognition of gain or loss from exchanges solely in kind
(1) In general
No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
(2) Exception
This subsection shall not apply to any exchange of -
(A) stock in trade or other property held primarily for sale,
(B) stocks, bonds, or notes,
(C) other securities or evidences of indebtedness or interest,
(D) interests in a partnership,
(E) certificates of trust or beneficial interests, or
(F) choses in action. For purposes of this section, an interest in a partnership which has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.
(3) Requirement that property be identified and that exchange be completed not more than 180 days after transfer of exchanged property For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if -
(A) such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or
(B) such property is received after the earlier of -
(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or

(ii) the due date (determined with regard to extension) for the transferor's return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs.
(b) Gain from exchanges not solely in kind
If an exchange would be within the provisions of subsection (a), of section 1035(a),
of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess
of the sum of such money and the fair market value of such other property.
(c) Loss from exchanges not solely in kind
If an exchange would be within the provisions of subsection (a), of section 1035(a),
of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.
(d) Basis
If property was acquired on an exchange described in this section, section 1035(a), section 1036(a), or section 1037(a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted by this section, section 1035(a), section 1036(a), or section 1037(a), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose
of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of this section, section 1035(a), and section 1036(a), where as part of the consideration to the taxpayer another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition (in the amount of the liability) shall be considered as money received by the taxpayer on the exchange.
(e) Exchanges of livestock of different sexes
For purposes of this section, livestock of different sexes are not property of a like kind.
(f) Special rules for exchanges between related persons
(1) In general
If -
(A) a taxpayer exchanges property with a related person,
(B) there is nonrecognition of gain or loss to the taxpayer under this section with respect to the exchange of such property (determined without regard to this subsection), and
(C) before the date 2 years after the date of the last transfer which was part of such exchange -
(i) the related person disposes of such property, or

(ii) the taxpayer disposes of the property received in the exchange from the related person which was of like kind to the property transferred by the taxpayer, there shall be no nonrecognition of
gain or loss under this section to the taxpayer with respect to such exchange; except that any gain or loss recognized by the taxpayer
by reason of this subsection shall be taken into account as of the
date on which the disposition referred to in subparagraph (C) occurs.
(2) Certain dispositions not taken into account
For purposes of paragraph (1)(C), there shall not be taken into account any disposition -
(A) after the earlier of the death of the taxpayer or the death of the related person,
(B) in a compulsory or involuntary conversion (within the meaning of section 1033) if the exchange occurred before the threat or imminence of such conversion, or
(C) with respect to which it is established to the satisfaction of the Secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.
(3) Related person
For purposes of this subsection, the term "related person" means any person bearing a relationship to the taxpayer described in section 267(b) or 707(b)(1).
(4) Treatment of certain transactions
This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.
(g) Special rule where substantial diminution of risk
(1) In general
If paragraph (2) applies to any property for any period, the running of the period set forth in subsection (f)(1)(C) with respect to such property shall be suspended during such period.
(2) Property to which subsection applies
This paragraph shall apply to any property for any period during which the holder's risk of loss with respect to the property is substantially diminished by
(A) the holding of a put with respect to such property,
(B) the holding by another person of a right to acquire such property, or
(C) a short sale or any other transaction.
(h) Special rule for foreign real property
For purposes of this section, real property located in the United States and real property located outside the United States are not property of a like kind.
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