December, 2003 Tax Tip
Take Advantage of Year-end Real Estate Tax Breaks
With proper planning on or before December 31, 2003 you may be able to save thousands of dollars on your 2003 income taxes. Real estate can be a big help to reduce your 2003 tax liability or increase your tax refund.
The following real estate tax strategies may cut your 2003 and/or 2004 income tax bill. While each one won't be practical for everyone, if just one or two apply, it can save you substantial tax dollars.
1. Purchase a principal residence by year-end - While it is already December, If you have been thinking about buying a house or condo and can complete your purchase and take title before December 31, 2003 you could still reap some tax savings this year. A typical home buyer who pays a loan fee to obtain a home acquisition mortgage can fully deduct that fee in the year paid. Each one-point loan fee equals one percent of the amount borrowed and usually reduces the loan interest rate about one-eighth percent. Additional home purchase costs that are typically tax-deductible include pro-rated property taxes and pro-rated mortgage interest (when assuming an existing mortgage). Most other closing expenses must be capitalized and added to the purchase price cost basis.
If closing this year is not possible, try to close as early as possible in 2004 to maximize your 2004 tax benefits.
2. Sell your principal residence – You can exclude up to $250,000 ($500,000 on a joint return) of gain from the sale of your principal residence. To qualify, you must have owned and occupied your principal residence at least two of the five years before its sale. If you have used a portion of the residence for business purposes for more than 3 of the prior 5 years, there likely will be a small tax due.
3. Refinance your home mortgage - Although loan fee points paid to refinance a home loan can only be amortized over the life of the refinanced mortgage, you will save on the interest payments and be able to claim future interest rate savings. If you previously refinanced your home loan, and have any undeducted loan fee points from a prior refinance, you can deduct those undeducted points in the year the old loan was retired.
4. Borrow on a home equity credit line to improve you home, pay off car or credit card debt, or use in your business - Home equity loans can be used to pay off debts on which interest is not deductible, such as credit card debt and many car loans. Interest on home equity loans up to $100,000 is tax deductible. When the purpose is for business use, the interest becomes a tax-deductible business expense.
5. Prepay your 2004 installment of property taxes in 2003 - Often a payment for either 2003 or 2004 is due early in 2004 anyway, so why not pay it early and obtain a significant deduction this year? Many property tax jurisdictions allow this. If in doubt, phone your local tax collector. If your property taxes are included in your mortgage payments, it may be very difficult to prepay them. If this is the case, try to get your lender to drop the requirement of having them included in your mortgage payments. If you have a history of timely payments they may be willing to accommodate you.
6. Prepay your January, 2004 mortgage payment in 2003 - Since the January payment will be due in a matter of days or weeks, it is a very common practice for it to be paid prior to the end of the year. This allows a homeowner to add one extra month's mortgage interest to his or her itemized deductions in 2003. It is suggested that you make the payment in sufficient time for your lender to receive and credit it to your account so it will be included on form 1098 sent to you be the lender. Otherwise, you will need to attach a statement to your tax return explaining the difference between the amount you deduct and the amount reflected on the 1098.
7. Deduct residential moving costs if you changed job locations in 2003 - If your job site changed and 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 qualify it does not matter 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. Defer making taxable home or other real estate sales until 2004 - If you plan to sell your home, or other real estate, which will result in a full or partial tax, consider postponing the sale closing until 2004. This gives you until April 15, 2005 to pay the tax. If you will be making quarterly estimated tax payments in 2004, it may also reduce the amount of those payments.
9. Deduct any uninsured theft or casualty losses - Many homeowners are reluctant to file insurance claims, for fear of insurance premium increases or insurance cancellation. 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. For a personal casualty loss to be deductible it must be over $100 and exceed 10 percent of your 2003 adjusted gross income. However, there is no limit to business casualty losses claimed on your business tax return.
Note: If you could have had reimbursement of part or all of your loss but failed to file an insurance claim, the IRS might contend that the deduction is limited to that portion of your loss that exceeds the foregone insurance reimbursement (subject to the above personal loss limitations). This may be harsh at least to the extent that it does not give recognition to the likely increase in insurance premiums one would incur in filing the claim.
10. Postpone tax on the sale of business or investment property by my making a section 1031 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, apartment, office building, land, or commercial property, you can defer the capital gain tax by making a qualifying tax-deferred exchange. Section 1031 of the Internal Revenue Code also authorizes delayed exchanges. That means you can sell the business or investment property but must have the sales proceeds held by a qualified third-party intermediary (commonly called "accommodator") beyond your constructive receipt.
After the sale of the old qualifying property, you have up to 45 days to identify a replacement property and up to 180 days to complete the acquisition. However, if your tax return is 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.
If any of the above planning strategies might apply to you, I would be happy to work with you to ensure that you structure them properly to obtain the maximum tax advantages.
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