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Tax Incentives



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By : Jacquelyn Marks    99 or more times read
When you own real property, you build equity and you get tax incentives. Mortgage interest, points and property taxes are all tax deductible on your personal income tax return the year in which you pay them. There are also additional tax deductions available when you own income property such as insurance premiums, legal and management fees, and traveling to and from the property. When you sell your property, a portion of your capital gains may be taxed at a much lower rate than your ordinary income, except any amounts that you already deducted for depreciation. You can also defer your income taxes with a 1031 tax exchange. If you move more than 50 miles closer to your employment, you can deduct your moving expenses with certain exceptions.


Mortgage interest

Interest you pay on your mortgage may be deducted on income taxes up to $1 million. Interest on a home equity loan may also be deducted on a loan up to $100,000.


Property tax deduction

Local state and county property taxes are deductible from your income tax. Money that is sitting in an escrow account to pay future taxes cannot be deducted until the taxes are paid.


Sale proceeds

Sale proceeds are not taxed up to $250,000 for a single homeowner and $500,000 for a married couple. To take advantage of the exemption, you must have lived in the home for two out of the last five years and you can only take the exemption every two years.


Moving expenses related to employment

If you move 50 miles or more closer to your job, you can deduct the moving expenses as long as you work full time for 39 weeks the next year.


1031 Tax Exchanges

Under Section 1031 of the Internal Revenue Code, you can exchange like for like-real estate and no capital gain or loss is recognized at the time of the exchange, which means you get to defer any taxes due. If you received additional non-like property, then your gain would be recognized and you would have to pay tax on it. Loss is not recognized on non-like property. With a 1031 tax exchange, you must identity the property you want to exchange within 45 days of closing on your relinquished property and choose a qualified intermediary within the meaning of IRS Code Section 1031. The exchange must be completed within 180 days from the close of the relinquished property to receive the tax deferment.


Reverse Exchanges

Reverse exchanges are more complicated. A reverse exchange is when you acquire a replacement property before you sell the relinquished property. The exchange must be completed within 180 days of acquiring the replacement property. You should check the IRS safe harbor rules regarding reverse exchanges. Reverse exchanges are used in down real estate markets like the one we are currently experiencing where it is harder to sell property and easier to buy.

The great advantage of owning property is you get to take advantages of tax savings every year that you own it and build equity in your property at the same time. It is recommended that you consult with an accountant or tax advisor to find out about all the tax deductions that are available to you so you can utilize them to reduce your income tax liability.
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