Differences Between A Condo And A Co-Op ?

Q: I have lived in Phoenix for quite some time but have never owned anything (I am a long-time renter). I am beginning to look around to familiarize myself with the market and have come across people referencing condos and co-ops. What are the main differences? Is it management of the building? Does the difference impact the value at all? Is there a difference in taxes?

A: A co-op is not real property. It’s a housing cooperative in which residents purchase shares of the co-op. Co-op boards hold great discretion when selecting new shareholders. Not only are the financial viability of the applicants considered, but the relative close proximity and interaction each resident has with each other is taken into consideration. I’ve heard rumors of applicants being turned down for having large pets, for social reasons, because the applicant is purchasing for investment only, or because the applicants gave the impression that they’ll be difficult or have horrible personalities. Each board is different in their standards, but a personal interview is common. If the potential buyer of a co-op apartment doesn’t want submit themself to a board application and interview, then they should look for sponsor units.

The benefit of co-ops are that that a buyer tends to (generally) get more square footage for their money and the co-op community is stable and financially viable. I would suggest that you contact your Realtor for more information.

Top 10 Tax Breaks, On The House

The New Year always turns thoughts to the new tax season and when it comes to taxes there’s no place like home to find shelter. Your home offers a score of tax deductions and credits designed to help offset the cost of housing and to keep the housing market fueled with new buyers.

Here’s a look at the Top 10 Tax Breaks, On The House.

# Mortgage Loan Interest: The Mother Of All Tax Breaks, because interest payments comprises a large portion of your mortgage payment in the early years of the loan’s term, mortgage interest on a maximum of $1 million in mortgage debt secured by a first and second home is deductible. Deductions reduce your taxable income against which your taxes due are calculated. The $1 million level applies to married tax filers who file jointly and single taxpayers. Married taxpayers who file separately split the maximum 50-50.

Likewise, home equity loan interest is deductible, but limited to the smaller of $100,000 (half as much for each member of a married couple if they file separately), or the total of your home’s fair market value as determined by a complicated formula.

# Home Improvement Loan Interest: The interest on a home improvement loan is also deductible, but calculated differently. You can deduct all the interest on a home improvement loan provided the work is a “capital improvement” rather than repairs, maintenance or cosmetic upgrades. Capital improvements typically increase your home’s value (say, because you added a room), prolong it’s life (a new roof) or adapt it to new uses (universal design improvements to assist older people or people with disabilities).

# Points: Points, each equal to 1 percent of the loan principal, are charged by lenders as part of the cost of the loan. You can fully deduct points associated with a home purchase mortgage, but not a mortgage broker’s commission. Refinanced mortgage points are deductible too, but only when they are amortized over the life of the loan. Once you refinance a second time, the balance of the old points from a refinanced loan offer an immediate write off, as you begin to amortize the new points.

# Property Taxes: Property taxes or real estate taxes are fully deductible. Any local city or state property tax refunds reduces your federal property tax deduction by the same amount.

# Capital Gains Exclusion: Home buying investors’ best tax shelter comes from provisions in the Taxpayer Relief Act of 1997 which allows married taxpayers who file jointly to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. The amount is halved for those filing single or separately.

# Home-Based Business Deduction: Home offices that use a portion of your home exclusively for business could qualify you to deduct a percentage of costs related to that portion. Included are a percentage of your insurance and repair costs, utility bills and depreciation.

# Selling Costs and Capital Improvements: When you sell your home, you can reduce your taxable capital gain by the amount of your selling costs, which include real estate commissions, title insurance, legal fees, advertising and inspection fees. Cost typically stemming from decorating or repairs — painting, wallpapering, planting flowers, maintenance, and the like — are also selling costs if you complete them within 90 days of your sale and with the intention of making the home more saleable.

Selling costs are deducted from your gain. Gain is your home’s selling price, minus deductible closing costs, minus selling costs, minus your tax basis in the property. Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.

# Moving Costs: A move triggered by a new job comes with some deductible moving costs. To qualify, you must meet certain requirements including, moving within one year of starting your new job, moving 50 miles farther from your old home than your old job was and working full-time at the new job for 39 of 52 weeks following the move. Deductions include travel or transportation costs and expenses for lodging and storing your household goods.

# Mortgage Tax Credit: Mortgage Credit Certificates (MCCs) allow qualifying low-income, first-time home buyers to take a mortgage interest tax credit of up to 20 percent (the amount varies by jurisdiction) of the mortgage interest payments made on a home. This credit is available every year you keep the loan and live in the house purchased with the certificate. Unlike a deduction that reduces your income, the credit is subtracted, dollar for dollar, from the income tax owed.

# Energy Tax Credits: The newest home-based tax credits were made possible last year by the Energy Policy Act of 2005. Tax credits of up to $500 in 2006 and 2007 are available for upgrading heating and air conditioning systems, insulations, windows, doors and thermostats, caulking leaks, installing pigmented metal roofs and for otherwise putting the bite on energy waste in your home.

Written by Broderick Perkins

The Homeowner Gain Exclusion Deduction

It’s been 10 years since Congress brought us the homeowner gain exclusion deduction — one of the most powerful and useful [tag]tax-saving[/tag] tools ever given to homeowners. The deduction itself is simple: If you have lived in your home for two out of the previous five years, you get a tax break when you sell it. If you’re married and you file a joint tax return the first $500,000 of gain (the difference between what you paid to buy the property and what you sold it for) you make on the sale is tax-free. If you’re single, you get a tax break on the first $250,000 of gain. What constitutes “living in” is pretty flexible, too. Those two years don’t have to be consecutive, nor do you have to physically live in your home every day. The IRS allows you to have temporary absences from your home each year that can be up to 11.5 months! You can literally buy a home, live in it for 2-3 weeks per year for two years and take the entire tax-free gain exclusion.

In most cases, this is a great strategy — buy, hold for 2 years and sell, tax-free. But what happens when the tax-free gain exclusion amount is less than the profit you make on your home sale?

Sometimes the path of least resistance is the best path of all. Simply by taking the gain exclusion deduction you’re saving $75,000 on the first $500,000 in profit. Because you’ve owned the property for more than one year, the remaining profit will only be taxed at the capital gains rate of 15 percent.

Another option would be to convert the home into a rental property by selling it at fair market value (FMV) into a business structure you own. A limited liability company (LLC) is a good choice in most states.

The advantages to this option are huge. First, you still get the tax-free gain exclusion deduction when you sell. Second, your home becomes a source of monthly income. You can refinance to pull some equity out if you need it for the purchase of another home, and, depending on how much equity you pull out, you should still be able to keep your “new” rental property cash-flowing, meaning the price you rent it out for will still be more than the costs to maintain it (mortgage, insurance, utilities, etc.). You’ll still get the benefit of appreciation, even though the market isn’t appreciating as fast anymore.

Third, because your LLC paid FMV, it gets the benefit of the “step-up” in basis, meaning that the sales price is the new basis. This is important, because an investment property can do something your personal residence can’t: Depreciate.

Depreciation is perhaps the number one (or maybe number two) reason to get into real estate. The government looks at real estate (the buildings, not the land) as something that goes down in value. So every year the building is worth a little less than the year before. After a certain period of time (27 years for commercial, 39 years for residential) the building has depreciated to zero.

In practical terms, this means your LLC can take a yearly depreciation deduction against the basis. That’s why being able to step-up the basis to current FMV is such a good thing — your LLC has a much bigger basis to depreciate against. Depreciation doesn’t cost you a dime, either — it’s what we call a “phantom” expense — which means it is created without you having to spend any money, first.

Depreciation is just one of the deductions you are now able to claim through your LLC. There are hundreds of others. But because depreciation is a phantom expense, it can have a huge impact on your tax bill at the end of the day. Depreciation often contributes to the LLC reporting a paper loss at the end of the year, which can be used to offset your personal W-2 income, meaning your personal tax bill will go down, too. Yet even though the LLC shows a paper loss, it’s actually making money for you each and every month.

So you get a huge tax break up front with the gain exclusion, a continuing source of passive income (from the rent) that is taxed at a lower rate than earned W-2 income, a giant source of deductions, a potential paper loss that will further reduce your W-2 income (and taxes), and you get to keep control of the property and benefit from its continued appreciation. What’s not to love?

Written by Diane Kennedy

Are You Leaving a Tax Deduction on the Table?

If you refinanced your home recently, you’re not alone. According to Plunkett Research, approximately $1.1 trillion dollars in mortgage loans was refinanced in the United States in 2006. But did you remember to take an increased mortgage interest deduction on your tax return if you were entitled to one?

Here’s how it works. You are allowed to take a deduction on your personal tax return for mortgage interest you pay on a loan that is secured by either your principal residence or a second home, up to one million dollars in acquisition indebtedness. That means mortgages, lines of credit and home equity loans all qualify, as long as they are secured by your home, and you are the primary borrower, and legally obligated to repay that loan.

What you call your first and second homes can be pretty open to interpretation. Pretty much anything will qualify if it has sleeping, cooking and toilet facilities.

The amount you can deduct depends on your mortgage. If your mortgage is more than $1 million, you can deduct all of the interest you pay on the first million, but you can’t deduct any more interest after that. Same goes for home equity loans of more than $100,000. You can deduct all the interest you pay on the first $100,000 of debt, but you can’t deduct any remaining interest. As with most things, there are some tax loopholes around that as well. It all has to do with what you do with the money you get from the loan.

If you have an Option ARM (adjustable rate mortgage), and you have been paying the interest-only option, then theoretically your entire mortgage payment is tax-deductible if it fits under the $1 million cap. Another type of Option ARM featured a “deferred” component, which meant not only could you defer your principal payments, you were also able to defer a portion of the interest due.

However, when it comes to your taxes, taking the deferred option route means your mortgage interest deduction is limited to the interest you actually paid. This makes sense — after all, why should you get a tax deduction for money you haven’t paid out? And you don’t lose anything, either. The interest deduction is merely suspended until such time as those extra interest payments are made.

When the Option ARMs began to adjust (and turn into traditional mortgages), many people found that their new mortgage payments were too high and the rush to refinance into lower payments was on. In most cases, a portion of the refinanced loan was also attributable to catching up on all of the unpaid mortgage interest that had accrued to date.

Once you’ve refinanced and paid off all that accrued interest, your suspended deduction is no longer suspended. So does this mean that the interest is suddenly deductible when you replace it with a new note? Perhaps! As of this moment, the IRS has not yet come up with a strong position one way or the other. Which means if you take this deduction, you’ll most likely get to keep it. As with all tax strategies, but especially brand new ideas like this one, make sure you check in with a tax professional who is clearly versed in the ins and outs of the tax code.

Normally it’s inadvisable to file amended tax returns unless there is a significant missed deduction amount. That’s because amendments are processed at the IRS by hand, rather than through the computer, and the more attention you draw to yourself … the more attention you draw to yourself. There is nothing in the Tax Code that says an IRS examiner can’t review your entire tax return, and not just the amendment you are making. However, in this case, depending on how much money is on the table, it may be to your best advantage to contact your CPA or tax-return preparer and see if you’ve got money on the table that would fit better in your pocket.

Written by Diane Kennedy