Did you know there are many tax benefits when it comes to owning a rental property? Check them out below:

Just about every expense associated with a rental property is deductible. The following are tax deductible costs associated with owning a rental property:

• Cleaning & Maintenance
• Homeowners insurance
• Mortgage Interest
• Property taxes
• Utilities (if you pay them instead of the tenant)
• Phone costs, PO Box, internet costs related to your rental property
• Repairs & Supplies
• Educational Expenses
• Real estate club dues
• Tenant credit report fees
• Professional fees
• Management Fees
• Homeowners association fees

Insurance deductions: You can deduct the premiums you pay for almost any insurance for your rental property activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers’ compensation insurance.

Legal and professional service deductions: You can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental property activity.

Capital gains on a rental property: When you sell a rental property, the profits are taxed as capital gains as opposed to ordinary income. The difference is important, because the maximum capital gains rate is 15 percent, whereas the maximum tax rate on ordinary income, as of 2010, is 35 percent.

Doing a 1031 Exchange on a rental property: If you plan to sell your rental property and buy a larger one, there is only one smart way to do it: through a 1031 exchange, also called a deferred exchange. In this process an exchange facilitator takes the cash that comes out of your sale and holds it until you close escrow on a replacement property. You must identify that property within 45 days and close within six months. It must be purchased for more than the price for which you sold your first property. If you keep using exchanges to sell and then buy, you defer the tax due forever.

Tax-free cash out: When you sell without doing a 1031 exchange you pay taxes on the profit; when you take cash out through a refinance, the money is tax-free until you sell. If you never sell, you never pay taxes. This is an excellent tax strategy for retirement: once you pay off or pay down the mortgage on a rental property you can refinance it and take cash out and still have the monthly rents coming in.

Tax time is upon us and what better time than now to share an article about the tax benefits of owning a home.

The Lawhead Team would like to share an article from Realtor.com written by John Adams about tax benefits for homeowners.

They say there are only two things you can count on in this world: death and taxes. But when it comes to owning a home, it appears there may be a third. And that is the favorable treatment of home ownership by the Internal Revenue Service.

Tax Benefit for the purchase – When buying your own home, most of the expenses are not tax deductible. But there is one exception that is worth finding for tax benefits.

The IRS says you can deduct interest in the year that it is paid, and that is usually part of each monthly loan payment. In addition, if the day you purchase is on any day other than the first of the month, you will likely pay a charge for “daily interest” between the day of closing and the end of the month. Look on line 901 of your HUD settlement statement.

Much more importantly, the IRS says that, in most cases, loan discount points and origination fees are tax deductions to the buyer, regardless of who pays them. Look at lines 801 and 802 of your settlement statement and see if you hit the jackpot. This is a particularly unusual deduction because you get the benefit even if the seller paid your closing costs. And because origination fees of 1% and more are common, this can amount to a lot of cash and huge tax benefits.

Mortgage interest tax benefits – In general, you can deduct interest charged on a loan used to acquire or improve your principal residence in the year that it is paid. In the early years of a loan, most of your monthly payment is interest, so this can really add up. If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third, depending on which state you live in. This is truly nothing more than a subsidy to home owners, and it’s a very popular deduction.

In addition, you can always deduct interest on an additional $100,000 of mortgage debt, which can be used for any purpose. This is called the “Home Equity Loan” exception, and it allows you to tap into your home equity for any purpose. This gives home owners the ability to do what is called “debt-shifting.” For example, if you live in an apartment and have a credit card balance of $10,000 at 18% interest, none of that interest would be deductible. But if you bought a house, obtained a home equity loan for $10,000 and paid off the credit card, then ALL of the interest expense becomes automatically deductible. Furthermore, the rate on the home equity loan is likely to be around prime plus one or two, usually much lower than credit card rates. This same technique works with any and all personal debt, from car loans to consolidation loans – with only one hitch. In every home equity loan, you have pledged your house as collateral for the loan. If you fail to pay the payments as agreed, you could lose your house to foreclosure. So be careful in using this technique for tax benefits.

The sale – This is the best. In fact, I can hardly believe this myself. Here’s how it works:  If you have owned and occupied your principal residence for at least two of the past five years, you can earn up to $500,000 on the sale of that house and pay no federal income tax whatsoever. That’s assuming you are married – singles get up to $250,000 tax free. And here comes the kicker:  You can do this as often as every two years for the rest of your life.

This is as good an excuse for getting married as I have ever heard for tax benefits. Buy a fixer-upper in an up and coming neighborhood, work on it nights and weekends for two years, then sell it at a nice profit and pocket the cash, totally free of federal taxes. And most states recognize the federal exclusion, so you put the cash away totally tax free. You don’t have to re-invest, you don’t have to be age 55, and you can do this every two years forever. No, I’m not kidding.

The one restriction for these tax benefits is that you MUST own and occupy the house as your principal residence, so don’t try this on a rental property by pretending you live there when you don’t. And there are some unclear rules about how you can take a partial exclusion if you live there less than two years, but we don’t really know what they mean yet, so I recommend you stay there two years.

Many of these benefits came into being with the 1997 tax law, but lots of folks are just finding out about them now, so buy and sell to your heart’s content. Just don’t plan on staying forever!

Read the entire article about tax benefits here: http://www.realtor.com/basics/buy/closepossess/taxbenefits.asp?source=web

The Lawhead Team has been staying up to date with the upcoming fiscal cliff and would like to share with our readers how it pertains to the housing recovery, particularly the mortgage forgiveness debt relief act.

Impact of the Fiscal Cliff, by Juliette Montoya-Cesena with WJ Bradley Mortgage Capital.

The fiscal cliff, the popular term for the upcoming tax increases and spending cuts if legislators fail to intervene, is weighing on the minds of most Americans. Caught up in the midst of the fiscal cliff debate are pieces of real estate legislation that housing experts say could significantly impact the housing recovery.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

The Mortgage Forgiveness Debt Relief Act is set to expire on Dec. 31, 2012. The law, enacted in 2007, temporarily amended the federal tax code to enable taxpayers to omit income debt reduction or cancellation on their primary residence. Debt reduction through restructuring of a mortgage, for example, refinancing and debt forgiveness through a foreclosure generally qualify under the law.
 
Why the Expiration Matters

An estimated 11 million homeowners are underwater. Any homeowners who participate in a short sale that closes after Jan. 1, 2013, will be subject to taxation on the amount of debt forgiven if the law is not extended.
 
In addition, the $25 billion settlement states reached with five top mortgage lenders over the so-called robo-signing scandal urges lenders to forgive billions in mortgage debt next year and in the future. The expiration of the tax relief act could deter Americans from taking part in the settlement, according to attorneys general of the participating states.
 
Housing experts argue that the expiration of the mortgage forgiveness debt relief act law would cause significant financial pain for a large group of homeowners who are already under duress.
 
The Mortgage Interest Deduction

As legislators propose ways to reduce the deficit and avert the fiscal cliff, legislators are proposing reducing the mortgage interest deduction.
 
The mortgage interest deduction lets homeowners reduce their annual taxable income by the amount of interest paid on their mortgage. The deduction is the largest of its type in the tax code, accounting for an estimated $90 billion in reduced income tax revenue.
 
The housing industry is fighting changes to the policy, arguing it would hurt the housing recovery, and therefore the economic recovery.
 
“This is the last thing Congress should be considering when what we’re trying to do is stabilize the economy,” Jerry Howard, head of the National Association of Home Builders, told The Hill.

Do you have further questions about the Fiscal Cliff and the Mortgage Forgiveness Debt Relief Act? Please call or email us, The Lawhead Team, Because Two Lawheads Are Better Than One^TM.

Mortgage interest deductions and deductions for property taxes are a way to encourage home ownership.

Mortgage Tax Credit – The Mortgage Credit Certificate (MCC) program allows some first time home buyers to benefit from a mortgage interest tax credit.  An MCC, which you first must obtain from your local housing department before you get a mortgage, gives a qualified first-time home buyer a federal income tax credit of up to 20 percent each year the buyer keeps the same loan and lives in the same house.  You can see the tax credit’s benefit immediately in your paycheck by adjusting your W-4 exemption status to reflect the credit.  In some cases, lenders will qualify you for a loan based on the monthly mortgage payment minus the tax credit, enabling you to qualify for a bigger loan.

Mortgage Interest Deduction – With Mortgage Interest Deduction, all but the very wealthy homeowners deduct all the mortgage interest they pay and consider that the primary tax benefit to home ownership.  IRS Publication 936 “Home Mortgage Interest Deduction” says, in general, joint tax filers can deduct all the interest on a maximum of $1 million in mortgage debts secured by a first and second home, plus the interest paid on a maximum $100,000 in home equity loans.  The maximums are halved for married tax payers filing separately.

Points – Home buyers also get to fully deduct all points associated with a home purchase mortgage.  Sometimes called “origination fees,” “loan discounts” and “broker discounts,” each point is one percent of the financed amount.  In many cases, the buyer can also deduct points on the buyer’s mortgage that are paid by the seller.  Points on refinanced mortgages are also deductible, but over time.

Selling Your Home – Even when you sell your home, it continues to be a tax shelter, for a few homeowners.  Your gain is your home’s selling price, minus deductible closing costs, minus your basis.  Thanks to the 1997 Taxpayer Relief Act, many home sellers no longer suffer a taxable gain.  That’s because, under the act, sellers get to keep, tax free, up to $250,000 in capital gains ($500,000 for married sellers who file taxes jointly) on sales of homes used as a principal residence for two of the prior five years.