Friday, December 21, 2007

Getting Ready For Next Tax Season

by M. Anthony Carr

If you've bought or sold a home in the past year, now is the time to go through your paperwork to find the forms, bills, and old checks you'll need in April -- and beyond.

Having sold three properties within a 13-month period, I learned quite a bit about what records the IRS requires to claim certain deductions, gains, losses, etc., versus what records I actually could find. The silver lining in all the cloudiness about taxes and your home is that the IRS has a great Web site, Digital Daily, filled with plenty of useful information. The site is easily navigable and searchable.

To get started, click over to the site and take a look at Publication 552, Recordkeeping For Individuals. Here you can find several important issues to consider.

Under Why Keep Records, the importance of the home as a strategic part of tax planning becomes evident when you notice the IRS advises that one of the reasons to keep records is to: "Keep track of the basis of property. You need to keep records that show the basis of your property. This includes the original cost or other basis of the property and any improvements you made."

With that said, every homeowner should start tracking the basis of his or her home from the day of settlement. Within Publication 523 there is, naturally enough, a section devoted to determining the basis of your home.

On the paper side, put together a folder that includes the records you'll need in the future to determine the basis of your home. (Reminder: The "basis" of your home is the cost of acquiring it, whether you pay cash, use mortgage financing, or a little bit of both. For real estate, the "basis" can include other items, such as recording fees and certain closing costs. For details, review the IRS publications and confer with your tax adviser.)

If you purchased a fixer upper, rehabilitation costs can be added to basis, with certain restrictions. Other additions to the property (such as that new deck) which added to its value may also be added to your basis.

To add these to the basis, however, you must keep good records on how much you spent for each improvement. If you're faced with a big bill for capital gains, these dollar amounts can be added to the basis, which can reduce your tax bill.
When selling property, a single homeowner can exempt $250,000 from the sale of a house from capital gains taxes ($500,000 for married couples) as long as the ownership requirements are met.

For example, a home buyer purchases a fixer-upper for $175,000 and puts $25,000 of rehabilitation into it. The basis is now $200,000. If in 20 years the homeowner owns the house outright and the property sells for $325,000 it would appear the homeowner would surpass the $250,000 exemption threshold. However, after reducing by the $200,000 basis, the gain is only $125,000 and no tax is due.

As you can see, hanging on to those settlement papers can save you big bucks later on when you decide to sell your house.

While you're at the IRS site, take the time to look up other publications and forms that may be important when looking at real estate and tax matters:
Publication 521: Moving Expenses
Publication 527: Residential Rental Property
Publication 530: Tax Information for First-Time Homeowners
Publication 544: Sales and Other Dispositions of Assets
Publication 547: Casualties, Disasters, and Thefts (Business and Nonbusiness)
Publication 551: Basis of Assets
Publication 587: Business Use of Your Home
Publication 936: Home Mortgage Interest Deduction

As with any tax issues, forms can be helpful but it's always in your best interest to consult with a tax professional.

For more information on real estate investing, resources and news, check out my Commonsense Real Estate Blog at

1 comment:

mark said...

Great article on the real estate happenings, I really enjoy reading your posts. Just for your information, Donald Trump is in big trouble right now with his real estate empire. I hope everyone can pull through this slump!!


Real Estate Professional