TAX TIPSTER

TAX TIPSTER^©¹⁹⁹⁴ #4

by Doug Heimforth CPA CFP

Real Estate

F TAX-DEFERRED EXCHANGES are not always the best tactic to use in deferring taxes on investment or business real estate. If there is a loss or when taxpayer's tax bracket is expected to change over a period of time, it may not be right.

F BETTER REPORT: Both the mortgagor and mortgagee must report seller-financed residential mortgages to the IRS each year. Otherwise you are penalized $50 each time.

F A TAX BREAK FOR FORGIVEN DEBT: The 1993 tax act gives debtors an option on reporting of lendor-cancelled-debt on business real estate. A debtor may elect to reduce the depreciable basis on the property rather than the previous rule of reporting the forgiven debt as income.

F NO YOU CAN'T withdraw money tax-free or penalty-free from an IRA to use as a down-payment on a first-time loan. You will end up owing tax on the profits and a penalty for early withdrawal.

F POINTERS: Consider how many years might elapse from the time you finance or refinance until you do so again. Use this as the "effective period" of your mortgage and amortize any points not deducted in the year of financing over this period. Remember, if there is sound logic (not merely tax avoidance) behind your tax tactic, it's probably ok.

F IT'S OK to make an extra mortgage payment in the current year and deduct the interest portion of the payment? NO! Even cash basis taxpayers must deduct the interest in the year to which it pertains, not the year in which it is paid. Unfortunately, the reverse is not true.

Note also that mortgage interest paid is reported to the IRS on Form 1098. If the figure shown on the tax return differs from the 1098, the IRS will contact you.

F Want Real Estate and liquidity? There is a way to satisfy both objectives. There are a number of stocks and mutual funds that own real estate. These funds enable the investor to share in income and appreciation from real estate without the perils of illiquidity, legal pitfalls, tenant hassles, etc. With the rebound in real estate, many of these stocks and funds are showing good results.