Buying a home is already complicated enough, but property taxes can add a whole extra layer of headache. When most people hear the term ‘tax season,’ they immediately go into mental shutdown. Tax law is indeed very in-depth and can be confusing for those who don’t have a lot of experience with it. However, if you own real estate, there are some tax issues that you’ll want to be privy to so you can avoid them at all costs. Here are 4 complicated real estate tax issues you should know about.
If you’ve spent any time learning about real estate investing, you’ve likely heard of the 1031 Exchange. The simple concept behind this tax break is that you can defer paying capital gains tax on a property you sell if you use the proceeds to invest in another property. However, there are many restrictions that apply. Most investors don’t realize that the properties must be considered ‘like’ by IRS terms. You can’t sell a single-family home and purchase a commercial apartment building without paying capital gains tax. The 1031 Exchange has a lot of limitations.
Schedule E Is A Must
If you’re fairly new to real estate investing, you may not be aware of the proper protocol for taxes. If you are unsure of the protocol, consider hiring a real estate tax attorney so that you can complete and submit the right forms to the IRS. Many people don’t realize that they must fill out the Schedule E Form with their taxes. Most believe they just need to report the rental income on their regular tax forms, and they’re done. That’s not the case. Be sure to seek out tax or accounting help if you need assistance.
Noting Personal Deductions As Business Ones
The IRS draws a fine line between personal deductions and those related to your real estate business. As an investor, you may find yourself constantly traveling to look at new potential properties. It may be very easy to spend some of that time in new places vacationing. While you may be tempted to notate all of your expenses during your travel as business-related, that could land you in trouble. When you report excessive spending, the IRS may audit your business and discover that you falsely claimed personal expenses as vital business ones.
Private Residences Have Capital Gain Exemptions
It’s very easy to get confused about capital gains tax. This is a tax on the sale of a property. While you’re subject to capital gains tax for your investment and vacation homes, you’re likely going to be exempt in the case of selling your personal residence. The exemption allows up to $250,000 per person in capital gains before any taxes must be paid. For a married couple, that’s up to $500,000 in profit before any tax kicks in.
When it comes to taxes, they can be confusing for many. Real estate tax issues are big in numbers and can have your head spinning. By understanding some of the common ones above, you can set yourself up to better avoid these issues in the future.