10 tax tips for home sellers

By Stephen Fishman
Inman News®

The IRS has recently issued a helpful list of 10 tax tips all homeowners should keep in mind when selling a home:

1. You are usually eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.

2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

4. If you can exclude all of the gain, you do not need to report the sale on your tax return.

5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.

6. You cannot deduct a loss from the sale of your main home.

7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.

8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

9. If you received the first-time homebuyer credit and within 36 months of the date of purchase the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year's tax return.

10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

For more information about selling your home, see IRS Publication 523, Selling Your Home.

10 expenses you can deduct when renting out a room

By Stephen Fishman
Inman News®

Lots of people are trying to earn a few extra bucks by renting out a room in their home. This can not only be a good source of income, but result in tax deductions.

If you rent out a room in your home, the tax rules apply to you in the same way as they do for landlords who rent out entire properties. This means you get to deduct the expenses arising from your rental activity.

There is one big difference, however: You must divide certain expenses between the part of the property you rent out and the part you live in, just as though you actually had two separate pieces of property.

You can fully deduct (or, where applicable, depreciate) any expenses just for the room you rent; for example, repairing a window in the room, installing carpet or drapes, painting the room, or providing your tenant with furniture (such as a bed).

In addition, if you pay extra homeowners insurance premiums because you're renting out a room, the full cost is a deductible operating expense.

If you install a second phone line just for your tenant's use, the full cost is deductible as a rental expense. However, you cannot deduct any part of the cost of the first phone line even if your tenant has unlimited use of it.

Expenses for your entire home must be divided between the part you rent and the part you live in. This includes your payments for:

• mortgage interest.
• repairs for your entire home; for example, repairing the roof or furnace, or painting the entire home.
• improvements for your entire home; for example, replacing the roof.
• homeowners insurance.
• utilities such as electricity, gas and heating oil.
• housecleaning or gardening services for your whole home.
• trash removal.
• snow removal costs.
• security system costs.
• condominium association fees.

You can also deduct depreciation on the part of your home you rent.

You can use any reasonable method for dividing these expenses. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. However, the two most common methods for dividing an expense are either based on the number of rooms in your home or based on the square footage of your home.

Example 1: Jane rents a room in her house to a college student. The room is 10 by 20 feet, or 200 square feet. Her entire house has 1,200 square feet of floor space. Thus, one-sixth, or 16.67 percent, of her home is rented out. She can deduct as a rental expense one-sixth of any expense that must be divided between rental use and personal use.

Example 2: Instead of using the square footage of her house, Jane figures that her home has five rooms of about equal size, and she is renting out one of them. She determines that one-fifth, or 20 percent, of her home is being rented. She deducts 20 percent of her expenses that must be divided between rental and personal use.

As the examples show, you can often get a larger deduction by using the room method instead of the square footage of your home.

Start planning your 2012 tax strategy now

The tax deadline may have just passed but planning for next year can start now. Being organized and planning ahead can save you time, money and headaches in 2013. Here are six things you can do now to make next April 15 easier.

1. Adjust your estimated tax

If you're self-employed, did you receive a refund for your 2011 taxes because you paid too much in estimated tax? If so, you should make sure the same thing doesn't happen this year. When you receive a refund it means you gave the IRS a tax-free loan. You should pay the minimum estimated tax possible without incurring an underpayment penalty. You'll do so if your estimated tax payments amount to 90 percent of the tax due for 2012 or 100 percent of the tax you paid for 2011 (110 percent if your adjusted gross income is more than $150,000).

2. Store your return in a safe place

Put your 2011 tax return and supporting documents somewhere secure so you'll know exactly where to find them if you receive an IRS notice and need to refer to your return. If it is easy to find, you can also use it as a helpful guide for next year's return.

3. Organize your record-keeping

Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoebox to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs or charity receipts come tax time.

4. Shop for a tax professional early

If you use a tax professional to help you strategize, plan and make financial decisions throughout the year, then search now. You'll have more time when you're not up against a deadline or anxious for your refund. Choose a tax professional wisely. You are ultimately responsible for the accuracy of your own return regardless of who prepares it.

5. Prepare to itemize deductions

You should itemize deductions only if they exceed the amount of the standard deduction. For 2012 this is $5,950 for singles and $11,900 for married people filing jointly. If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions into 2012 may pay off. An early or extra mortgage payment, pre-deadline property tax payments, planned donations or strategically paid medical bills could equal some tax savings. See the Schedule A instructions for expenses you can deduct if you're itemizing and then prepare an approach that works best for you.

6. Make retirement contributions now, rather than later

Contributions to retirement accounts such as a 401(k) or IRA are one of the best tax breaks the self-employed have. Once you establish such an account, you have until the due date of your tax return for the next year (April 15 of the following year plus extensions) to contribute to the account and take a deduction. However, you'll save more in taxes if you contribute now, rather than waiting until the last minute. This is because all the income your retirement accounts earn is tax-free.

You forgot to file your taxes, now what?

Real Estate Tax Talk

By Stephen Fishman
Inman News®

The deadline for filing your federal income tax return -- or an extension of time to file -- was April 17. If you missed it, what should you do? And, even more important, what will the IRS do to you?

If you fail to file a tax return or contact the IRS, you are subject to the following:

• Penalties and interest will be assessed and will increase the amount of tax due. You'll have to pay the IRS interest of 0.5 percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25 percent maximum penalty is reached. The interest rate increases to 1 percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. You'll also owe a late-filing penalty, which is usually 5 percent of the tax owed for each month, or part of a month that your return is late, up to five months. If your return is more than 60 days late, the minimum penalty for late filing is the smaller of $135 or 100 percent of the tax owed.
• If you're self-employed, you will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.
• The IRS will file a substitute return for you. But this return is based only on information the IRS has from other sources. Thus, if the IRS prepares this substitute return, it will not include any additional exemptions or expenses you may be entitled to and may overstate your real tax liability.
• Once the tax is assessed, the IRS will start the collection process, which can include placing a levy on wages or bank accounts or filing a federal tax lien against your property.

You should file your return as soon as possible and pay all the tax that is due, if any. Even though you missed the deadline, you'll still save money by doing so. This is because the IRS late penalty and interest charges are calculated from April 17, so the earlier you file, the less you pay.

If you can't afford to pay all the tax that is due, you should still file and pay as much as you can. By paying as much as possible now, the amount of interest and penalties you'll owe will be lessened.

You can enter into an installment agreement with the IRS. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all required returns and be current with estimated tax payments. If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application at www.irs.gov.

Misconceptions about 2 common real estate tax breaks

Some homeowners better off not taking home office deduction

By Tom Kelly - Inman News®

One of the biggest financial advantages of owning a home is the mortgage interest deduction, but the amount many taxpayers submit is often greater than the allowed limit.

And, while home offices have become more popular because of convenience and the downturn in the economy, many homeowners may be better off not taking the deduction because of the depreciation recapture upon sale.

Both the mortgage interest and home office topics need to be double-checked before the April 17 deadline. Why April 17 this year instead of April 15? According to the Internal Revenue Service, taxpayers will have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday.

In addition, Emancipation Day, a holiday observed in Washington, D.C., falls this year on Monday, April 16. According to federal law, Washington, D.C., holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year.

Taxpayers requesting an extension will have until Oct. 15 to file their 2012 tax returns. Remember that an extension of time to file is not an extension of time to pay. You will owe interest on any past-due tax and you may be subject to a late-payment penalty if timely payment is not made.

In a recent column, we discussed the benchmark for the mortgage interest deduction is set at acquisition debt, which is the amount of debt in place when the home is acquired. For example, if you buy a $200,000 home with a $50,000 down payment, your acquisition debt is $150,000.

Many consumers stay in their homes for years, accumulate appreciation and then refinance to put a child through school, mom into a nursing home or attend a much anticipated family reunion. The new debt on the refinance will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing.

For example, let's assume your home is now worth $300,000 and you need to take cash out for college tuition. The balance of your loan before you refinance is $135,000 and you take $100,000 "cash back" for a new loan balance of $235,000.

However, the maximum allowable mortgage interest deduction remains $135,000 -- the acquisition debt, not the bigger number from the refinance.

Another popular deduction that is often taken yet needs additional consideration is the home office deduction. It's relatively easy for taxpayers to deduct the cost of a home office. To qualify for a deduction, the space must be used exclusively and on a regular basis for either the entire business or its administrative and management activities.

If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be "for the convenience of your employer."

A home office deduction is comprised mainly of depreciation, utilities and insurance. For example, if a home has 2,500 square feet and the detached garage now deemed "the office" is 250 square feet, then 10 percent of the utilities and insurance are deductible.

The actual office depreciation is 10 percent of what would be a depreciation deduction if the entire home were being depreciated for tax purposes. (Depreciation is not allowed on a typical principal residence, so the square footage allotted to "residence" would not qualify.) Supplies and other expenses directly related to the home office are fully deductible.

However, all these benefits do come at a price. The tax law originally stated that if you sell your home at a gain, any depreciation for a home office will have to be "recaptured." That means that any profit on the business portion is taxable as capital gain.

On Dec. 23, 2002, the IRS issued new regulations concerning gain on home sales. As long as the home office was in the same structure and not separated from the home, only the depreciation taken for the home office after May 6, 1997, is subject to tax.

Still, that depreciation recapture amount could be a lot more than you expect. It may be worthwhile to simply work from home and not deem the space a "home office."

Tom Kelly's new e-book, "Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico's Lower Cost of Living Can Avert a Tearful Retirement," is available online at Apple's iBookstore, Amazon.com, Sony's Reader Store, Barnes & Noble, Kobo, Diesel eBook Store, and Google Editions

Misconceptions about 2 common real estate tax breaks

Some homeowners better off not taking home office deduction

By Tom Kelly - Inman News®

One of the biggest financial advantages of owning a home is the mortgage interest deduction, but the amount many taxpayers submit is often greater than the allowed limit.

And, while home offices have become more popular because of convenience and the downturn in the economy, many homeowners may be better off not taking the deduction because of the depreciation recapture upon sale.

Both the mortgage interest and home office topics need to be double-checked before the April 17 deadline. Why April 17 this year instead of April 15? According to the Internal Revenue Service, taxpayers will have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday.

In addition, Emancipation Day, a holiday observed in Washington, D.C., falls this year on Monday, April 16. According to federal law, Washington, D.C., holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year.

Taxpayers requesting an extension will have until Oct. 15 to file their 2012 tax returns. Remember that an extension of time to file is not an extension of time to pay. You will owe interest on any past-due tax and you may be subject to a late-payment penalty if timely payment is not made.

In a recent column, we discussed the benchmark for the mortgage interest deduction is set at acquisition debt, which is the amount of debt in place when the home is acquired. For example, if you buy a $200,000 home with a $50,000 down payment, your acquisition debt is $150,000.

Many consumers stay in their homes for years, accumulate appreciation and then refinance to put a child through school, mom into a nursing home or attend a much anticipated family reunion. The new debt on the refinance will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing.

For example, let's assume your home is now worth $300,000 and you need to take cash out for college tuition. The balance of your loan before you refinance is $135,000 and you take $100,000 "cash back" for a new loan balance of $235,000.

However, the maximum allowable mortgage interest deduction remains $135,000 -- the acquisition debt, not the bigger number from the refinance.

Another popular deduction that is often taken yet needs additional consideration is the home office deduction. It's relatively easy for taxpayers to deduct the cost of a home office. To qualify for a deduction, the space must be used exclusively and on a regular basis for either the entire business or its administrative and management activities.

If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be "for the convenience of your employer."

A home office deduction is comprised mainly of depreciation, utilities and insurance. For example, if a home has 2,500 square feet and the detached garage now deemed "the office" is 250 square feet, then 10 percent of the utilities and insurance are deductible.

The actual office depreciation is 10 percent of what would be a depreciation deduction if the entire home were being depreciated for tax purposes. (Depreciation is not allowed on a typical principal residence, so the square footage allotted to "residence" would not qualify.) Supplies and other expenses directly related to the home office are fully deductible.

However, all these benefits do come at a price. The tax law originally stated that if you sell your home at a gain, any depreciation for a home office will have to be "recaptured." That means that any profit on the business portion is taxable as capital gain.

On Dec. 23, 2002, the IRS issued new regulations concerning gain on home sales. As long as the home office was in the same structure and not separated from the home, only the depreciation taken for the home office after May 6, 1997, is subject to tax.

Still, that depreciation recapture amount could be a lot more than you expect. It may be worthwhile to simply work from home and not deem the space a "home office."

Tom Kelly's new e-book, "Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico's Lower Cost of Living Can Avert a Tearful Retirement," is available online at Apple's iBookstore, Amazon.com, Sony's Reader Store, Barnes & Noble, Kobo, Diesel eBook Store, and Google Editions