PURCHASING TAX ADVANTAGES are dollars spent on the original purchase of a property which tax laws allow you to offset against income.

OWNERSHIP TAX ADVANTAGES are the ongoing annual tax advantages that Uncle Sam allows for real estate holdings.

SELLING TAX ADVANTAGES are ways to utilize the tax codes to minimize or defer taxes on the profits from the sale or exchange of real estate holdings.

PROPERTY TAX DUE DATES this complicated could only be dreamed up by the government. Hopefully this chart will help.

HOMEOWNER'S TAX EXEMPTION is not as helpful as it once was, but every little bit does help.

The information in this section of UtahRealtors.info is very general in nature, and does not include detailed information on any of the existing tax laws. For complete and up to date information on current tax laws, consulting with a professional tax advisor is strongly suggested.

PURCHASING TAX ADVANTAGES

The main tax advantages in the purchasing stage of buying a home are the closing costs the Internal Revenue Service allows a buyer to use as a deduction from income. Some of the most common allowable deductions include:

LOAN POINTS - (100%)

Loan points are by far the largest loan costs allowable as a deduction. This is important to remember, as loan points are almost always a variable when choosing a loan program. Many borrowers elect to pay more points at the beginning of a loan, with the goal of obtaining a lower interest rate over the life of the loan. Since one loan point is 1% of the amount borrowed, a borrower can easily create a large write-off by choosing higher points, with the added bonus of creating a lower interest rate and lower monthly payments.

PRORATED INTEREST - (100%)

At the close of escrow on a home purchase, a buyer/borrower is usually charged with prorated interest as a closing cost. This is because the lender must receive interest payments from the day of the closing of the escrow until the end of that first calendar month. In other words, an escrow closing on July 15th will reflect prorated interest costs from July 15th through July 30th. These interest charges are fully deductible for the buyer. Since interest payments on real estate loans are usually charged in arrears, the buyer's September 1st payment will be credited towards their loan costs from August 1st through August 31st.

PRORATED TAX PAYMENTS - (100%)

Any prorated property tax payments charged to a buyer through escrow are a deduction for the buyer. These property tax pro-rations are common, as most escrow closings do not coincide with the exact due dates of the property tax due dates. Therefore, if a seller has made property tax payments beyond the date of the seller's ownership of the property, escrow will credit the seller and debit the buyer a prorated share of property tax payments from the close of escrow until the next tax payment due date. This tax payment charge is fully deductible for the buyer.

OWNERSHIP TAX ADVANTAGES

Throughout the course of owning a home, there are several tax advantages a homeowner can use.

INTEREST DEDUCTION

Current tax law allows a homeowner to deduct the interest paid on most home loans for owner-occupied principal residence. Since the vast majority of the monthly payments made on a home loan are interest payments (at least during the first half of the life of the loan), this is a significant tax deduction for most homeowners. Recent tax laws have placed a limit on the amount of interest a homeowner can deduct, but for homeowners who have purchased a property under one million dollars, all of the interest paid is deductible.

A homeowner who wishes to increase the amount of annual interest deductions can opt to procure a home loan amortized over 15 years (versus the standard 30 year loan), providing higher monthly interest payments.

 PROPERTY TAX DEDUCTION

Another popular deduction used to offset homeowner income is payments made for property taxes. Annual property taxes for owner-occupied homes throughout the state of California are approximately 1.25% of the sales price. So, as an example, a homeowner with a purchase price of $600,000 can expect to pay annual property taxes in the amount of $7,500. This tax expense can be used as a deduction to offset income taxes for the homeowner on the I.R.S. 1040 form.

Homeowners in need of a higher tax deduction for any given year can explore the possibility of making property tax payments for the coming year prior to the December 31st taxpayer deadline.

 REFINANCING ADVANTAGES

One desirable part of the tax code that has not changed for years has to do with refinancing. Homeowners who take cash out of their properties by refinancing can enjoy this money, tax free. To some homeowners this law sounds too good to be true. However, the I.R.S. has a reason for not taxing this income. Funds obtained from refinancing are considered borrowed money, and therefore not subject to federal income tax.

When considering the possibility of taking out tax-free cash from refinancing, a homeowner should also consider the tax deductibility of the new interest payments. Although the original purchase money first trust deed payments are allowable as a tax deduction, some refinance interest payments may not be deductible.

SELLING TAX ADVANTAGES

Uncle Sam has provided a host of options to assist real estate investors in their goal of minimizing federal income taxes due upon the sale or exchange of real property.

1997 TAXPAYER RELIEF ACT was a very favorable piece of tax legislation recently passed to help owners who sell their principal residence. This law effectively eliminates the previously popular I.R.S. 1034 Exchange.

1031 TAX DEFERRED EXCHANGE has helped thousands of real estate investors defer income taxes on properties held as income property. The non-concurrent closing dates evolving from the Starker case made these exchanges feasible.

CAPITAL GAINS TAXES

The tax rate for capital gains has changed many times over the years. The Taxpayer Relief Act of 1997 changed this tax rate again, reducing taxes on net capital gains, while increasing the holding periods for long term capital assets.

1997 TAXPAYER RELIEF ACT

In 1998 a tasty morsel of real estate tax law became effective that significantly eased the pain of selling an owner occupied home. In simple terms, this new law allows an individual seller to avoid paying taxes on a profit up to $250,000, or $500,000 for a married couple filing jointly. The previous Internal Revenue Code 1034 which allowed homeowners to "roll-over" the profits in their owner-occupied homes has been eliminated. To qualify for the new law, taxpayers must meet the following criteria:

* Must be the taxpayer's principal residence.

* Must have lived in the home at least two of the five years before the closing date.

* Must not have used this exclusion in the past two years.

There is no limit as to the number of times this exclusion can be used. There are some exceptions to the holding period criteria if the seller sells because of a job transfer or if the sale is facilitated because of health reasons.

Owners of rental property can utilize this tax advantage by moving in to the property and satisfying the holding period requirements.

The Internal Revenue Service has eliminated the requirement for the taxpayer to file Form 2119 - Sale of Personal Residence. Sellers who do have a taxable gain must now report it on Schedule D of Form 1040. To help you figure it all out, I.R.S. Publication 523 "Selling Your Home" explains all of the details of this tax law. This publication can be obtained on-line at I.R.S. ONLINE FORMS. These forms can also be obtained by faxing a request to the I.R.S. at (703) 368-9694.

For more detailed information on the 1997 TAXPAYER RELIEF ACT, check out this article by Garrett-Hornickel Tax Accountants as published on the South Bay Homes website of Dennis Schoonover.

1031 TAX DEFERRED EXCHANGE

Real estate investor's use of section 1031 of the Internal Revenue Code evolved from a trickle to a flood when the U.S. courts supported the "Starker Exchange". This landmark decision allowed sellers of real estate investment properties to defer the taxes upon the sale of a property if the seller "exchanged" a like-kind property within 180 days of the closing of the investor's downleg property. Up until the time that the Starker Delayed Exchange took effect, sellers of investment properties had to close the escrow on any property purchased concurrently with the sale of their property, to be able to defer taxes. Coordinating these simultaneous closings often involved the concurrent closings of many different properties with many different owners and was often a logistical nightmare. Allowing sellers more time to coordinate an exchange was the perfect solution to the time constraints of the normal tax deferred exchange.

There are several basic rules that must be followed to effectuate a 1031 Delayed Exchange, including:

* The sales price of the acquisition property (or properties) must be equal to or greater than the sales price of the sale property.

* The loans on the acquisition property (or properties) must be equal to or greater than the property given up.

* No notes or trust deeds may be carried back.

* The seller must identify the like-kind replacement property (or potential properties) in writing to the accommodator within 45 days of the closing date of the exchange property.

* The exchanger must complete the sale of the up leg property within 180 days of the original sale, or by the due date of the seller's next tax return, including extensions, whichever occurs first.

The exchanger's failure to comply with the price or loan provisions of this law does not cancel the use of the exchange, however the difference in sales price or loan balance is taxable. Also, any cash taken from the sale is considered "boot", and is taxable.

The term "like kind" property has more leeway than may appear. Like-kind means that both the property exchanged and the property purchased must be held for productive use in trade or business. In other words, the exchanger could exchange a rental house for a mobile home park, as long as they were both used in the same capacity as rental property in a business investment.

It is important to inform all parties to the transaction about the 1031 Exchange prior to entering into a sales contract, as the parties in the sale must move forward with full knowledge of the 1031 Exchange option.

For further questions and answers on 1031 Exchanges, the web site of 1031 CORP has plenty of good information.

CAPITAL GAINS TAXES

The 1997 Taxpayer Relief Act was well received by the majority of the public, and for many reasons. In addition to providing realistic guidelines for homeowners to avoid taxes on the sale of their principle residence (see article above), this law also helped ease the tax bite for homeowners who had no way of getting around capital gains.

For taxpayers in the 28 percent marginal tax bracket, the new top capital gains rate was reduced to 20 percent. For taxpayers in the 15% tax bracket, the top rate was reduced to 10%. Both of these rates apply to investments held for more than 18 months.

In addition to the tax rate reductions, this law also reduced the qualifying holding time for capital gains to 18 months. The 20 percent top capital gains rate drops even further to 18% for assets held more than 5 years. A top tax rate of 8 percent applies to investors in the 15% tax bracket holding property for over 5 years.

PROPERTY TAX DUE DATES

Property taxes are assessed as of 12:01 a.m. on March 1st for the fiscal year. The fiscal year runs from July 1st through June 30th of the following year. Do not bother to memorize those dates, but you might want to pay closer attention to these next dates.

The 1st Installment of tax is due on November 1st of each year. (Delinquent on December 10th at 5:00 p.m. - thereafter interest penalty starts). The first installment of tax payment covers the period from July 1st through December 31st.

The 2nd Installment is due February 1st the following year. (Delinquent April 10th at 5:00 p.m. - thereafter interest penalty starts). The second installment of tax payment covers the period from January 1st through June 30th.

If the 1st and 2nd installments of tax are not paid by 5 p.m. on June 30th, additional penalties will accrue, and the property is "Sold to the State". This term starts the 5 year redemption period, and if the total taxes and penalties are not paid by the end of the 5th year, the actual title to the property can pass to the state. The county tax collector will eventually sell the property at public auction, after receiving approval to do so by the Board of Supervisors and the State Controller.

HOMEOWNER'S TAX EXEMPTION

The Homeowner's Exemption is available for owner-occupied homes that are claimed as a primary residence as of March 1st on the annual tax roll. This exemption excludes $7,000 from the regular assessed value of the property, thereby reducing the homeowner's annual property taxes by approximately $70.

This exemption must be applied for, and applications are usually included with the homeowner's supplemental tax bill after purchasing a home.

The Homeowner's Exemption does not automatically roll over to subsequent home purchases and therefore must be applied for with each new primary residence purchased. Once granted, the Homeowner's Exemption remains in effect until terminated, or until the property is sold.

Homeowners who move from a property with the exemption are required to notify the Assessor of this change, or a penalty may be charged.