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Real Estate Investment Chapter 8 Single-Family Dwellings and Condominiums © 2011 Cengage Learning
Key Terms Acquisition debt Adjusted basis of the home Advance rentals Business use of a home Capital gain Capital improvement Exclusion Home equity debt Long-term lease Part-time for rental purposes Realized selling price Time-sharing ownership
© 2011 Cengage Learning The Principal Residence That place where the taxpayer actually lives most of the time and calls “home.” Condominium Single-family house Vacant lot with mobile home or tent Retirement units Etc….
© 2011 Cengage Learning Allowable Tax Deductions Interest Property Taxes Casualty Losses Limited to lesser of Decrease in market value Adjusted basis in the property
© 2011 Cengage Learning Limits on Interest Deductions Home acquisition debt Debt that incurred in acquiring, constructing, or substantially improving any qualified residence. principal residence plus one For such mortgages originated after 10/13/87, interest is deductible on debt that does not exceed $1 million. Debt limited to $500,000 married taxpayer filing separately or a single person.
© 2011 Cengage Learning Limits on Interest Deductions Home Equity Debt In addition to the acquisition debt, interest is deductible on loans up to $100,000 $50,000 for each married taxpayer filing separately
© 2011 Cengage Learning Limits on Interest Deductions Additional Qualified Residential Property Mobile homes, boats, vacation cabins…. Discount as a Deduction Property Tax Deduction Taxpayer-owned residences without limitations
© 2011 Cengage Learning Tax Treatment on Gain from Sale $250,000 if single or $500,000 if married and filing jointly Requirements: House must be owned as taxpayer’s main home for 2 or more years during five-years prior to sale If married, only one spouse needs to meet this requirement. Taxpayer must not have sold or exchanged another main home over last 2 years.
© 2011 Cengage Learning Calculation of Capital Gain on Sale of Personal Residence Difference between the adjusted basis of the home and the realized selling price Basis of Property Value Adjusted basis
© 2011 Cengage Learning Adjustments to Basis Increases: Improvements Additions Other capital expenses Special assessments for local improvements Amounts spent to restore damaged property
© 2011 Cengage Learning Adjustments to Basis Decreases: Insurance reimbursements for casualty losses. Deductible casualty losses not covered by insurance. Payments received for easement or right-of- way granted. Depreciation allowed, but only if the home is used for business or rental purposes.
© 2011 Cengage Learning Realized Selling Price Total Consideration Received Cash, notes, mortgages, fair market value of any real or personal property received. Less Selling Expenses Sales commission, advertising, legal fees, loan placement fees or discount points. Less Fixing-Up Expenses Decorating and repair costs incurred solely to assist in the sale.
© 2011 Cengage Learning Record Keeping Proof of the home’s purchase price and purchase expenses. Receipts and records for all improvements, additions, and other items that affect the home’s adjusted basis. Worksheets concerning the adjusted basis of the home, the gain or loss on the sale, the exclusion, and the taxable gain. Form 982 regarding discharge of indebtedness. Form 2119 filed to postpone gain from the sale of a previous home. Worksheets that were used to prepare Form 2119.
© 2011 Cengage Learning Sample Calculation of Property Basis Original cost of duplex $450,000 Addition to duplex 20,000 Total cost of duplex 470,000 Minus: Depreciation 70,000 Adjusted basis before casualty 400,000 Minus: Insurance proceeds $29,700 Deducted casualty loss 6,000 Salvage proceeds 5,300 $41,000 41,000 Adjusted basis after casualty 359,000 Add: Cost of restoring duplex 15,000 Adjusted basis after restoration $374,000
© 2011 Cengage Learning Sale of a Principal Residence Married Couple Filing Jointly Purchase Price $180,000 Purchase Costs $10,000 Acquisition Basis $190,000 Capital Improvements $30,000 Adjusted Basis $220,000 Sales Price $700,000 Less Adjusted Basis $220,000 Gain on the Sale $480,000 Less Exclusion $500,000 Taxable Gain -0- Capital Gains Tax Rate* 20% Tax Due -0-
© 2011 Cengage Learning Sale of a Principal Residence Married Couple Filing Jointly Purchase Price $180,000 Purchase Costs $10,000 Acquisition Basis $190,000 Capital Improvements $30,000 Adjusted Basis $220,000 Sales Price $800,000 Less Adjusted Basis $220,000 Gain on the Sale $580,000 Less Exclusion $500,000 Taxable Gain $80,000 Capital Gains Tax Rate* 20% Tax Due $16,000
© 2011 Cengage Learning RESIDENCE CONVERTED TO RENTAL USE Necessary to determine the basis from which the property may be depreciated. Basis is the lesser of: 1. The fair market value of the property on the date of conversion. 2. The adjusted basis of the property
© 2011 Cengage Learning RESIDENCE CONVERTED TO RENTAL USE The income and expenses of rental property are subject to IRS rules Rental Income Regular Payments Advance Rent Payment for Lease Cancellation Expenses Paid by Tenant
© 2011 Cengage Learning RESIDENCE CONVERTED TO RENTAL USE Rental Expenses Cost Recovery (Depreciation) Repairs and Maintenance Handicap Exception Other Expenses Rental of a room
© 2011 Cengage Learning Business Use of the Home Permissible deductions include depreciation, maintenance, insurance, and utility expenses allocated to the portion of the house used for business deduction taken for depreciation reduces the basis of value Taxpayers may no longer lease a portion of a home to an employer and claim deductions as a business usage.
© 2011 Cengage Learning Business Use of the Home The limit on deductions is the gross income from that business minus the sum of: 1. The business % of the otherwise deductible taxes and casualty and theft losses. 2. The business expenses not attributable to the use of the home, such as salaries and supplies.
© 2011 Cengage Learning Part-Time Rental Units Most commonly used for vacation homes Dwelling unit may be a house, apartment, condominium, mobile home, boat, or other similar property Personal use occurs when a dwelling unit is used by: 1. The taxpayer, a member of the family, or any other person with an interest in the property, unless a fair market rental is paid. 2. Anyone under a reciprocal arrangement that enables the taxpayer to use some other dwelling unit. 3. Anyone at less than a fair rental.
© 2011 Cengage Learning Part-Time Rental Units Allocation of Expenses Category 1—Rented Less Than 15 Days Category 2—Part Rental, Part Personal Use Limitations on Allocation of Expenses Category 3—Personal Use, Less Than 15 Days
© 2011 Cengage Learning Time-Sharing Ownership Time-sharing ownership means the holding of rights to exclusive use of real estate for a designated length of time Long-Term Lease Condominium Time-Sharing
© 2011 Cengage Learning Condominiums Typically a fee simple estate in a specific unit, while owning the community property as a tenant in common The Unit Owner Mortgage Interest Real Estate Taxes Maintenance, Repairs, Insurance Depreciation or Cost Recovery Capital Improvements Sale or Exchange of a unit
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