Human nature being what it is, nobody likes to pay taxes. Certainly, no more than they have to. Real estate does offer some opportunities along those lines.
The tax benefits that most primary home owners are familiar with are the deductibility of real estate taxes and mortgage interest on their primary residences up to certain limits. Points, which represent pre-paid interest, are also deductible. Each point is equal to one percent of the loan. When the property is sold, the seller may also deduct certain closing costs incurred when the property was purchased. An owner of a second or vacation property may deduct property taxes and interest up to certain limits. They may lease their vacation homes in any given tax year for a period of less than fifteen days without income reporting requirements. If the owner leases the property for a period greater than fourteen days, the vacation home is considered an income producing property and taxed accordingly.
The change in the Tax Law in 1997 was significant with respect to profit on the sale of a home occupied as a primary residence for two of any of the five years prior to the sale. It allows for the deduction of a gain up to $250,000 for a single filer, and up to $500,000 for a married couple filing a joint return. Where there is more than one single filer, each may deduct up to $250,000 not to exceed $500,000 over all. With respect to the married couple filing jointly, only one spouse must own the property to be eligible for the $500,000 marital deduction. Same-sex married couples are eligible for the marital deduction as a result of the Supreme Court decision regarding the Defense of Marriage Act. The exclusion may be taken every two years. It is also possible to qualify for a proportionate deduction if the home has to be sold before the two year occupancy requirement. The eligibility is allowed under hardship conditions delineated in the Tax Code.
In addition to the exclusions from capital
gains, the cost of capital improvements made to the home while occupied as a primary residence may be added to the adjusted cost basis along with certain closing costs incurred when the property was purchased, including the 1% New York State "Mansion Tax" on the purchase price of one million dollars or more for one, two, or three unit building, including residential condominiums and cooperatives. The payment of the 2% Community Preservation Fund Tax, (Peconic Tax), may also be added to the adjusted cost basis. Qualified first-time homebuyers in Southampton, Shelter Island, East Hampton and Southold are exempt from paying the tax upon making application to the Towns.
New York State STaR Program, (School Tax Relief), allows a reduction from the school tax portion of the property's real estate taxes on a primary residence. In order to be eligible, the household income may not exceed $500,000. The Enhanced STaR exemption is available if at least one owner is at least sixty-five years of age and the adjusted household income does not exceed $81,900. This amount is scheduled to increase in 2015 to $83,300.
For investment properties, Section 1031 of the Federal Tax Code allows for the deferment of taxes due on the exchange of investment properties. The properties must be of "like kind" meaning investment properties including unimproved properties intended for commercial development, income producing residential properties, and other qualified properties identified in the Tax Code. These exchanges have to be conducted through a qualified intermediary. The replacement properties must be identified within forty-five days and the exchange conducted within one hundred and eighty days. Where the value of the properties are not equal, the owner of the lesser valued property must pay "boot" - personal property to even out the exchange.
Each of these tax issues is more complex than articulated in this article, and a tax lawyer or accountant should be consulted before attempting to utilize any of these tax benefits.
John is a St. John's University graduate, licensed Real Estate Broker, DOS Certified Instructor, and real estate consultant. He previously taught at NYU, LIU, and The Cook Maran Real Estate School, which he helped found.