|A vacation home can be a house, apartment, condominium, mobile home or boat. If you own a vacation home that you rent to others, you generally must report the rental income on your federal income tax return. But you may not have to report that income if the rental period is short.In most cases, you can deduct expenses of renting your property. Your deduction may be limited if you also use the home as a residence.
Here are some tips from the IRS about this type of rental property.
• You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss.
You may also be subject to paying Net Investment Income Tax on your rental income.
• If you personally use your property and sometimes rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. The number of days used for each purpose determines how to divide your costs.
Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
• If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about this rule, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
• If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.
Get Publication 527 for more details on this topic. It is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
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Push-and-shove over the value of the mortgage-interest deduction isn’t abating. And there are some new data that support economists who contend the deduction benefits higher-end homeowners more.
A study by the Pew Charitable Trust shows that most of those who benefit from the deduction are in states on the East and West Coasts, where most of the nation’s affluent homeowners are.
(It must be said that Pew is supplying and analyzing data only so that those considering a change to the tax code can make an informed choice.)
According to Pew, one of the largest of the tax code’s expenditures is the deduction for home-mortgage interest. Tax filers who own a home and itemize their deductions are allowed to subtract from their income interest paid on mortgage debt.
In tax year 2011, filers deducted about $360 billion, “resulting in roughly $72 billion in forgone federal income tax revenue,” the Pew study says.
Only two federal tax expenditures were larger that year, Pew says, “and in years past, this deduction has often ranked second behind the exclusion for employer-provided health insurance.”
According to Pew, fewer than half of all homeowners and about a quarter of tax filers claim the deduction, available only to homeowners who itemize deductions.
The benefit increases with the size of the mortgage.
I had assumed that the real estate downturn had an impact on the total amount of deductions during those years.
Pew’s study says total mortgage interest deducted by tax filers hit its peak in 2007, “resulting in $543 billion in deductions and roughly $85 billion in forgone revenue.”
From 2007 to 2010, the total deduction amount fell 28 percent, and the number of claims declined by 12 percent.
The middle of the country was the least affected.
The percentage of tax filers deducting mortgage interest in 2010 ranged from a high of nearly 37 percent in Maryland to a low of 15 percent in West Virginia and North Dakota.
The U.S. average was 25.5 percent. Pennsylvania was at 20 percent to 25 percent. New Jersey was 32 percent and higher. Delaware fell in between, 26 percent to 31.9 percent.
The average U.S. deduction was $2,713 – Pennsylvania fell around there. New Jersey and Delaware were in the $3,000-to-$3,999 bracket.
Virginia, Maryland, and California had the three highest average deductions – $4,000 to $4,999.
Claims were highest in metropolitan areas, especially in the Boston-to-Washington corridor, the report shows.
In Pennsylvania, the highest percentage of claims were in the Philadelphia, Allentown-Bethlehem-Easton, and York-Hanover metro areas – 29 percent and above. The same three areas had the high deduction amounts: $2,800.
New Jersey and Delaware were not broken down in the Pew study.
According to National Association of Realtors’ research, eliminating the mortgage deduction would cause a 15 percent decline in the value of homes nationwide.
If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.
Here are 10 key facts from the IRS about mortgage debt forgiveness:
1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.
2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.
3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.
4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.
5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.
6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.
7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.
8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.
9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.
10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.
SOURCE: IRS Tax Tips 2013-31
On Jan. 1 both the Senate and House passed H.R. 8 legislation to avert the “fiscal cliff.”
The bill was signed into law by President Barack Obama on Jan. 2.
Below is a summary of real estate related provisions in the bill:
Real Estate Tax Extenders
- Mortgage Cancellation Relief is extended for one year to Jan. 1, 2014
- Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012
- 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012
- 10 percent tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012
Permanent Repeal of Pease Limitations for 99% of Taxpayers
Under the agreement so called “Pease Limitations” that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. These thresholds have been increased and are indexed for inflation and will rise over time. Under the formula, the amount of adjusted gross income above the threshold is multiplied by three percent. That amount is then used to reduce the total value of the filer’s itemized deductions. The total amount of reduction cannot exceed 80 percent of the filer’s itemized deductions.
These limits were first enacted in 1990 (named for the Ohio Congressman Don Pease who came up with the idea) and continued throughout the Clinton years. They were gradually phased out as a result of the 2001 tax cuts and were completely eliminated in 2010-2012. Had we gone over the fiscal cliff, Pease limitations would have been reinstituted on all filers starting at $174,450 of adjusted gross income.
Capital Gains rate stays at 15 percent for those in the top rate of $400,000 (individual) and $450,000 (joint) return. After that, any gains above those amounts will be taxed at 20 percent. The $250,000/$500,000 exclusion for sale of principal residence remains in place.
The first $5 million dollars in individual estates and $10 million for family estates are now exempted from the estate tax. After that the rate will be 40 percent, up from 35 percent. The exemption amounts are indexed for inflation.
Beginning January 1, 2013, a new 3.8 percent tax on some investment income will take effect. Since this new tax will affect some real estate transactions, it is important for REALTORS to clearly understand the tax and how it could impact your clients. It’s a complicated tax, so you won’t be able to predict how it will affect every buyer or seller.
Read different examples and scenarios on how this new tax works
To get you up to speed about this new tax legislation, the NATIONAL ASSOCIATION OF REALTORS® has developed the following informational brochure.
On the following pages, you’ll read examples of different scenarios in which this new tax — passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Barack Obama’s health care and Medicare overhaul plans — could be relevant to your clients.
Understand that this tax WILL NOT be imposed on all real estate transactions, a common misconception. Rather, when the legislation becomes eff ective in 2013, it may impose a 3.8% tax on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses). The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.
|The Internal Revenue Service has some important information for those who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.Here are 10 tips from the IRS to keep in mind when selling your home.
1. In general, you are 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 full 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 of your home 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. Most tax software can also help with
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. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.
10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail 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. This publication is available at IRS.gov or by calling 800-TAX-FORM
|Income that you receive for the rental of your vacation home must generally be reported on your federal income tax return. However, if you rent the property for only a short time each year, you may not be required to report the rental income.The IRS offers these tips on reporting rental income from a vacation home such as a house, apartment, condominium, mobile home or boat:
Rental Income and Expenses
Rental income, as well as certain rental expenses that can be deducted, are normally reported on Schedule E, Supplemental Income and Loss.
Limitation on Vacation Home Rentals
When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.
You are considered to use the property as a residence if your personal use is more than 14 days, or more than 10% of the total days it is rented to others if that figure is greater. For example, if you live in your vacation home for 17 days and rent it 160 days during the year, the property is considered used as a residence and your deductible rental expenses would be limited to the amount of rental income.
Special Rule for Limited Rental Use
If you use a vacation home as a residence and rent it for fewer than 15 days per year, you do not have to report any of the rental income. Schedule A, Itemized Deductions, may be used to report regularly deductible personal expenses, such as qualified mortgage interest, property taxes, and casualty losses.
IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes), is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676). The booklet offers more information about rental property, including special rules about personal use and how to report rental income and expenses.
|The IRS has some advice for taxpayers who missed the tax filing deadline.Don’t panic but file as soon as possible.If you owe money the quicker you file your return, the less penalties and interest you will have to pay. Even if you have to mail us your return, the sooner we receive it, the better.
E-file is still your best option. IRS e-file programs are available for most taxpayers through the extension deadline – October 15, 2012.
Free File is still available. Check out IRS Free File at irs.gov/freefile. Taxpayers whose income is $57,000 or less will qualify to file their return for free through IRS Free File. For people who make more than $57,000 and who are comfortable preparing their own tax return, the IRS offers Free File Fillable Forms. There is no software assistance with Free File Fillable Forms, but it does the basic math calculations for you.
Pay as much as you are able. Taxpayers who owe tax should pay as much as they can when they file their tax return, even if it isn’t the total amount due, and then apply for an installment agreement to pay the remaining balance.
Installment Agreements are available. Request a payment agreement with the IRS. File Form 9465, Installment Agreement Request or apply online using the IRS Online Payment Agreement Application available at irs.gov.
Penalties and interest may be due. Taxpayers who missed the filing deadline may be charged a penalty for filing after the due date. Filing as soon as possible will keep this penalty to a minimum. And, taxpayers who did not pay their entire tax bill by the due date may be charged a late payment penalty. The best way to keep this penalty to a minimum is to pay as much as possible, as soon as possible.
Although it cannot waive interest charges, the IRS will consider reductions in these penalties if you can establish a reasonable cause for the late filing and payment. Information about penalties and interest can be found at Avoiding Penalties and the Tax Gap.
Refunds may be waiting. Taxpayers should file as soon as possible to get their refunds. Even if your income is below the normal filing requirement, you may be entitled to a refund of taxes that were withheld from your wages, quarterly estimated payments or other special credits. You will not be charged any penalties or interest for filing after the due date, but if your return is not filed within three years you could forfeit your right to the refund.
More information can be found at irs.gov.