REAL ESTATE TAX BREAKS

Planning now may save thousands of dollars! This is the time of year when savvy taxpayers think about how to minimize their income taxes. Real estate can be a big help to slash your income tax bill and increase your tax refund.

Please be aware that if these tax strategies are to save you 2003 tax dollars, they must be completed by December 31, 2003. The IRS won't accept any excuses. Use it or lose it. That's the tax rule.

Here are 10 year-end real estate tax decisions that can cut your 2003 income tax bill. Each one won't be practical for everybody. But just one or two can save you hundreds, even thousands, of tax dollars:

1—BUY A PRINCIPAL RESIDENCE BY YEAR-END. If you have been thinking about buying a house or condo, why not complete your purchase and take title before December 31, 2003 to gain significant tax savings this year?

Presuming a typical home buyer who pays a loan fee to obtain a home acquisition mortgage, that fee is fully tax-deductible in the year paid. Each one-point loan fee equals one percent of the amount borrowed and usually reduces the loan interest rate about three eighths of a percent.

Additional home purchase costs that are typically tax-deductible include pro-rated property taxes and pro-rated mortgage interest. Most other closing expenses must be capitalized and added to the purchase price cost basis.

2—SELL YOUR PRINCIPAL RESIDENCE. If you could use up to $250,000 tax-free cash, sell your principal residence. Better yet, if you're married and file a joint tax return, up to $500,000 of your home sale profits can be tax exempt.

Of course, I'm referring to Internal Revenue Code 121. This great tax benefit entitles home sellers to these tax savings. To qualify, you must have owned and occupied your principal residence at least two of the five years before its sale.

3—REFINANCE YOUR HOME MORTGAGE. Although loan fee points paid to refinance a home loan can only be deducted over the life of the refinanced mortgage, you will save on the interest payments and be able to claim future interest rate savings.

For this reason, when refinancing, it's usually best to obtain a zero-cost or low-cost mortgage and not pay any loan fee points.

If you previously refinanced your home loan, and have any undeducted loan fee points from a prior refinance, be sure to deduct those undeducted points in the year of the second refinance.

4—BORROW ON A HOME EQUITY CREDIT LINE TO FIX UP YOUR HOME, PAY OFF NON-DEDUCTIBLE LOANS SUCH AS A CAR LOAN, OR EXPAND YOUR BUSINESS. Home equity credit line loans can be used for any purpose. If you have enough home equity, it might be wise to pay off non-deductible credit card loans, car loans and student loans. Interest on home equity loans up to $100,000 are tax deductible.

When the purpose is for business use, the interest becomes a tax-deductible business expense. Most home equity credit line lenders offer these loans around the prime rate.

5—PREPAY YOUR 2004 PROPERTY TAXES IN 2003. You can prepay all or part of your 2004 property taxes before December 31, 2003, thus gaining an extra itemized 2003 tax deduction.

6—PREPAY YOUR JANUARY 2004 MORTGAGE PAYMENT IN 2003. Every December, mortgage lenders receive a surge of billions of dollars in mortgage prepayments. The reason is homeowners want to add at least one month's extra mortgage itemized deduction to their itemized interest tax deduction.

However, to be able to claim the extra deduction, be sure your mortgage lender receives and credits your extra mortgage payment well before December 31, 2003 so the interest will be included on your IRS form 1098 supplied by your mortgage lender.

7—REMEMBER TO DEDUCT RESIDENTIAL MOVING COSTS IF YOU CHANGED JOB SITES IN 2003. If your job site changed in 2003, and if you also moved to another residence in 2003, whether you own or rent, you might qualify to deduct your household moving expenses.

To qualify, your new job site must be at least 50 miles further from your old home than was your old job site. To illustrate, suppose you drove four miles from your old residence to your old job location, but the distance from your old home to your new job site is over 54 miles.

Congratulations. In this example you qualify to deduct most of your household moving expenses. Ironically, the IRS doesn't care about the distance from your new home to your new job location.

Qualification doesn't depend on whether you work for the same employer, a new employer, or became self-employed. However, the moving expense tax deduction has minimum employment times required in the vicinity of your new location, even if you change employers or job locations again.

8—POSTPONE TAXABLE HOME SALES UNTIL NEXT YEAR. If you plan to sell your home, or other real estate, which will result in a full or partial tax (perhaps because your principal residence sale capital gain exceeds $250,000 or $500,000), postpone that sale closing until 2004. You will then have until April 15, 2005 to settle up on your taxes.

9—REMEMBER TO DEDUCT ANY UNINSURED CASUALTY OR THEFT LOSS. As homeowners become reluctant to file insurance claims, for fear of insurance premium increases or insurer cancellation, now is the time to remember to deduct any uninsured casualty or theft losses which you paid yourself.

If you suffered a "sudden and unexpected" loss, not paid by insurance, due to fire, flood, hurricane, mudslide, accident, theft, or other qualifying event, it may qualify as a casualty loss tax deduction.

But only personal casualty losses over $100, which exceed 10 percent of your 2003 adjusted gross income, are deductible. To illustrate, suppose you paid $5,000 to repair your home after a kitchen fire, and your adjusted gross income is $30,000. Then your tax-deductible casualty loss is $1,900 ($5,000 minus $3,000 minus $100). However, there is no limit to business casualty losses claimed on your business tax return.

10—INDEFINITELY POSTPONE TAX ON A BUSINESS OR INVESTMENT PROPERTY SALE BY MAKING A TAX-DEFERRED EXCHANGE. If you are selling real estate that is fully or partially held for investment or use in a trade or business, such as a rental house, duplex, apartments, offices, land, warehouse or commercial property, you can indefinitely postpone the capital gain tax by making a qualifying tax-deferred exchange.

Internal Revenue Code 1031(a)(3) authorizes so-called Starker delayed exchanges. That means you can sell the business or investment property and must have the sales proceeds held by a qualified third-party intermediary beyond your constructive receipt.

After the sale of the old qualifying property, you have up to 45 days to identify the replacement property and up to 180 days to complete the acquisition. However, if your tax returns become due on April 15, 2004 during the 180-day replacement period, to avoid losing the tax deferral be sure to file for an extension if you have not completed the acquisition by April 15, 2004.

SUMMARY. There are at least 10 year-end real estate tax strategies, which can result in significant 2003 income tax savings. Please consult your tax adviser for full details to take maximum advantage of these tax breaks.
(Robert Bruss, Inman News)

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