How I Handle My Vacation Home So That I Can Do A 1031 Exchange
by Gary Gorman
After a recent Tax Court ruling that disallowed one taxpayer's 1031 exchange of his vacation (or "second") home, I've seen articles on this topic that range from "this was a bad ruling, so ignore it," to "the sky is falling and you can no longer 1031 vacation homes under any circumstance."
So can you exchange a vacation home? For those of you who are not familiar with this controversy, let me summarize the issue: Section 1031 allows the deferral of the gain from one investment property into another. Properties held strictly for personal enjoyment do not qualify. The question is, "Are vacation homes held for investment, or for personal enjoyment?” The Tax Court ruling clarified that vacation homes held strictly for personal enjoyment do not qualify. The trick then is to differentiate your property from purely personal enjoyment, and cast it, or document it, as investment property.
Here is what I'm doing on a vacation home I own: Since my property is in a complex where property management is not available, I use an on-line leasing service which has proven to be an effective way for me to manage the leasing of this property from a distance because it showcases my property very well -- so my site gets lots of hits.
I keep a copy of the inquiries, and my responses, in a separate email folder as a part of my Outlook file. This proves that I've sincerely tried to rent the property. I also keep a calendar of the dates that I use the property, and whether I used the property for enjoyment or for maintenance. I have a cleaning service that I use to clean the unit between renters, but periodically we like to go in and do deep cleaning ourselves. Also, I have a number of great clients in that city, and occasionally I'm there for meetings or to give a speech or a class, and I stay in the unit on those occasions.
My calendar, therefore, reflects the dates that I used the property and whether I used it for enjoyment, maintenance or business. I try to keep the enjoyment days to less than 14 days a year, and I make sure the maintenance days are reasonable because the IRS will allow you 14 personal enjoyment days, as well as a reasonable number of maintenance days a year. In my case I typically use the property for 10 to 14 personal days, two to four maintenance days, and 7 to 14 business days a year. The rest of the time it's either rented, or available for rent.
At the end of the year I file Schedule E for this property with my tax return. Schedule E is the form that reports income and expenses (including interest & taxes) from rental property. Don't deduct the interest and taxes for your vacation property on Schedule A of your tax return. Schedule A is the form you file to report personal deductions associated with your personal residence. The IRS is very formal about these things, and they assume that if the property were truly an investment property you would have filed Schedule E.
Make sure too that you are depreciating your property. Depreciation is required for rental property, but not allowed for personal enjoyment property. It's another one of those things that impacts how the IRS views the property.
I recommend that you have a separate bank account for your rental property -- actually I would prefer a separate account for each rental property. You don't want to run the income and expenses for your rental property through your personal check book.
If you want to exchange your property when you sell it, assume that you'll get audited, so do things correctly from the beginning. The difference between being able to do an exchange and deferring the tax, or having to pay tax on the sale of your vacation home depends upon your willingness to follow the steps I've laid out above.
Published: February 4, 2008
Use of this article without permission is a violation of federal copyright laws.
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Friday, February 15, 2008
Thursday, February 14, 2008
New Buyers on The Fence?
This article was published on: 02/01/2008
Good investments 5 Things to Tell Buyers on the Fence If you have indecisive buyers, give them these reasons why they should put their money in a home instead of the stock market. BY BLANCHE EVANSIt's high time we told buyers (and sellers, for that matter) the truth about whether a home is a good investment.Despite what Wall Street wants you to believe, owning a home isn't the same kind of investment as stocks or bonds. What you get is a USE asset that depreciates over time while it grows in market value. All you have to do is keep the home in good repair to maximize your investment.Here are five reasons why you get more for your money with a house than the stock market:1. Leverage. With stocks, you put in all your money for a little piece of a company. With a house, you put in a little money to get the entire house.2. Tax benefits. Uncle Sam knows that owning a home is a pain in the neck; that's why you get tax incentives. These are basically government bribes to get you to buy. Think about it, with what other investment can you put in 5 percent of the cost of the asset, reap all the appreciation, and pay no capital gains? That's right: live in your home for at least two years, and you don’t have to pay capital gains tax on up to $250,000 in appreciation if you’re single and a combined $500,000 if you’re a married couple.And that's not all — consider the benefits of fixed-rate mortgages, property tax write-offs, interest rate deductions, and depreciation. Is this a great country or what?3. Control. When you buy stocks, you're paying some CEO 500 times the average worker's salary for company performance that most other workers would lose their job over. With a home, you have control — what you buy, how much you pay, and where you live. You can improve the value with repairs and updates. Try comparing that to getting heard at the next shareholders' meeting!4. Lifestyle. Do you want to look at a concrete jungle or your children playing in your own back yard? With a home, you're purchasing a vantage point for yourself and your family. The neighborhood you want to be in, and the size and style of a home that fits your needs.5. Value. Unlike some stocks, your house will seldom become worthless. Barring a catastrophe, your home will retain a major portion of its value, even in the worst of times. So don't freak out about slight fluctuations in the value of your home in any given year. You'll make it up. Housing has lost value only one year out of the last 35. It's more normal to beat inflation by 1 percent to 2 percent.Take Stock in ThisSo let's add a little perspective here. You lost a greater percentage on the stock market this past year than if you owned a house. You lost more on your SUV. And you sure lost more on your iPhone.And keep this in mind: When it rains, which would you rather have over your head — a roof or a stock certificate?(c) Copyright 2008 Realty Times. Reprinted with permission.
www.InvestSmarter.com for more information on home buying tips in Panama City Beach, Panama City, and Destin Florida
Good investments 5 Things to Tell Buyers on the Fence If you have indecisive buyers, give them these reasons why they should put their money in a home instead of the stock market. BY BLANCHE EVANSIt's high time we told buyers (and sellers, for that matter) the truth about whether a home is a good investment.Despite what Wall Street wants you to believe, owning a home isn't the same kind of investment as stocks or bonds. What you get is a USE asset that depreciates over time while it grows in market value. All you have to do is keep the home in good repair to maximize your investment.Here are five reasons why you get more for your money with a house than the stock market:1. Leverage. With stocks, you put in all your money for a little piece of a company. With a house, you put in a little money to get the entire house.2. Tax benefits. Uncle Sam knows that owning a home is a pain in the neck; that's why you get tax incentives. These are basically government bribes to get you to buy. Think about it, with what other investment can you put in 5 percent of the cost of the asset, reap all the appreciation, and pay no capital gains? That's right: live in your home for at least two years, and you don’t have to pay capital gains tax on up to $250,000 in appreciation if you’re single and a combined $500,000 if you’re a married couple.And that's not all — consider the benefits of fixed-rate mortgages, property tax write-offs, interest rate deductions, and depreciation. Is this a great country or what?3. Control. When you buy stocks, you're paying some CEO 500 times the average worker's salary for company performance that most other workers would lose their job over. With a home, you have control — what you buy, how much you pay, and where you live. You can improve the value with repairs and updates. Try comparing that to getting heard at the next shareholders' meeting!4. Lifestyle. Do you want to look at a concrete jungle or your children playing in your own back yard? With a home, you're purchasing a vantage point for yourself and your family. The neighborhood you want to be in, and the size and style of a home that fits your needs.5. Value. Unlike some stocks, your house will seldom become worthless. Barring a catastrophe, your home will retain a major portion of its value, even in the worst of times. So don't freak out about slight fluctuations in the value of your home in any given year. You'll make it up. Housing has lost value only one year out of the last 35. It's more normal to beat inflation by 1 percent to 2 percent.Take Stock in ThisSo let's add a little perspective here. You lost a greater percentage on the stock market this past year than if you owned a house. You lost more on your SUV. And you sure lost more on your iPhone.And keep this in mind: When it rains, which would you rather have over your head — a roof or a stock certificate?(c) Copyright 2008 Realty Times. Reprinted with permission.
www.InvestSmarter.com for more information on home buying tips in Panama City Beach, Panama City, and Destin Florida
Tightened Standards on Mortgages
Mortgage Insurer Tightens Standards
Beginning next month, MGIC Investment Corp., the country’s largest mortgage insurer, will reduce its exposure in weak housing markets by requiring at least 5 percent down on homes in what it calls restricted markets.These markets include the entire states of Arizona, California, Florida, and Nevada, as well as the metropolitan areas of Washington, D.C., Detroit, Chicago, Boston, and Atlanta. Home owners hoping to insure condos will have to put down 10 percent.The company also will refuse to insure mortgages with little or no documentation, nor will it insure investment property loans in restricted areas. Home owners in the restricted markets who put down 10 percent will have to have FICO scores of at least 620 out of a possible 850. If they put down less, their scores will have to be at least 680.Home owners typically must get mortgage insurance when they put down less than 20 percent of their home’s value.MGIC expects the new requirements to result in the issuance of fewer new policies, according to its filing with the Securities and Exchange Commission.Competitor PMI Group Inc. also announced in a filing that it would stop covering home loans with loan-to-value ratios of more than 97 percent.Source: The Associated Press, Emily Fredrix (02/11/08)
For more updates on available solutions visit www.InvestSmarter.com today!
Beginning next month, MGIC Investment Corp., the country’s largest mortgage insurer, will reduce its exposure in weak housing markets by requiring at least 5 percent down on homes in what it calls restricted markets.These markets include the entire states of Arizona, California, Florida, and Nevada, as well as the metropolitan areas of Washington, D.C., Detroit, Chicago, Boston, and Atlanta. Home owners hoping to insure condos will have to put down 10 percent.The company also will refuse to insure mortgages with little or no documentation, nor will it insure investment property loans in restricted areas. Home owners in the restricted markets who put down 10 percent will have to have FICO scores of at least 620 out of a possible 850. If they put down less, their scores will have to be at least 680.Home owners typically must get mortgage insurance when they put down less than 20 percent of their home’s value.MGIC expects the new requirements to result in the issuance of fewer new policies, according to its filing with the Securities and Exchange Commission.Competitor PMI Group Inc. also announced in a filing that it would stop covering home loans with loan-to-value ratios of more than 97 percent.Source: The Associated Press, Emily Fredrix (02/11/08)
For more updates on available solutions visit www.InvestSmarter.com today!
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