Tax Tips and FAQs for Real Estate Owners and Investors

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Real Estate Tax Tips

Tip #1: Defer capital gains taxes through 1031 exchanges

In real estate, a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. For example, exchanging a condo rental for a single-family rental would qualify as like-kind.

By making a 1031 exchange, you’ll either have no tax or limited tax due at the time of the exchange. This allows your investment to continue to grow tax deferred. There’s no limit on how frequently you can do a 1031. You can repeatedly roll over the gain from one piece of investment real estate to another.

Read more on Investopedia.


Tip #2: Take advantage of mortgage interest deductions

You can deduct home mortgage interest on the first $750,000 of indebtedness, or $1 million if you are deducting mortgage interest from indebtedness incurred before December 16, 2017. Generally, home mortgage interest is any interest you pay on a loan secured by your home. The loan may be a mortgage to buy your home, or a second mortgage.

The term points is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest if you itemize deductions. 

Read more on the IRS Publication.


Tip #3: Aim for long term capital gain rates

When you hold an asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it for one year or less, your capital gain or loss is short-term. 

If you have a net capital gain (long term), a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The tax rate on most net capital gain is no higher than 15% for most individuals. Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.

Read more on the IRS Tax Topic.


Real Estate Tax FAQs

From IRS Tax Tips – Real Estate

Is interest on a home equity line of credit deductible as a second mortgage?

It depends. Interest paid on home equity loans and lines of credit is only deductible when you use the proceeds to buy, build or substantially improve your home that secures the loan.

For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.

Is the mortgage interest and real property tax I pay on a second residence deductible?

Yes and maybe. Mortgage interest paid on a second residence used personally is deductible as long as the mortgage satisfies the same requirements for deductible interest as on a primary residence.

If you rent out your second residence, and you use it personally, additional rules may impact the deductibility of mortgage interest and real property taxes.

If I must deduct points over the life of my mortgage, and I have a 30-year mortgage, should I divide the points paid by 30 and enter that amount on Schedule A?

No. While you must deduct the points over the life of the loan ratably (equally), you don’t divide the points by 30 years. Instead, you divide the points by the number of payments scheduled over the term of the loan (360 monthly payments in the case of a 30-year mortgage) and deduct points each year according to the number of payments you made in that year (less than twelve payments in some cases).

Do I count security deposits as income?

It depends. Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.

What if I receive property or services in lieu of rent?

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.

Example: Your tenant is a painter. He offers to paint your rental property instead of paying 2 months’ rent. You accept his offer. Include in your rental income the amount the tenant would have paid for 2 months’ rent. You can include that same amount as a rental expense for painting your property.


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