3 Often Overlooked Real Estate Tax Breaks

how to minimize what we owe and maximize what we get back on taxes

Mar 23, 2014 at 11:45AM
Blog Feb

I've been in this business long enough now to have mastered the timeline along which most of our real-estate-related thought processes play out vis-a-vis the actual calendar. January dawns with thoughts of getting geared up to buy a home, move up or downsize, or simply clean, spruce and upgrade the home we have. The month winds down with a dribble of those large-sized envelopes in the mail, containing an assortment of tax forms, documenting everything from what we earned last year to what we paid out for mortgage interest.

As soon as we slice those statements open, our thinking starts to shift to tax time and tax issues: Will we owe? If not, what will we get back? What does our tax picture look like now – and how can we improve it for next year?

Lots of people make lots of moves – real estate and otherwise – to minimize what they owe and maximize what they get back on their taxes. The first step is to make sure you're not actually missing any tax deductions and breaks you already qualify for. The tax code is 4 million words and over 70,000 pages long, but most Americans tap into fewer than 15 pages of it when filing their returns. To make sure we're not missing anything we're due, here are a few of the real estate-related tax breaks that are often missed, overlooked and underused.

1. State and Local Tax Breaks for Green Home Improvements. 
Most of us focus on federal income tax deductions, because federal taxes seem like the biggest bank account drain. In fact, in some state tax rates can reach as much as 15 percent of annual income!

According to Trulia, As the recession recovery made it's way into full swing in 2013, many homeowners began embarking down a path of improving their home's energy efficiency for a variety of reasons, including cash savings on their utility bills. Many of those improvements are eligible for state, county and/or city tax credits or tax breaks. If you installed dual-paned windows, insulation, low-flow plumbing appliances, tankless water heaters or solar panels in 2013, dig up your receipts and talk with your tax preparer or visit your state, county and city government websites to research tax advantages you might already be eligible for.

2. Mortgage Interest Tax Break
Many homebuyers expressly call out the mortgage interest tax deduction as a major motivation behind their desire to own a home. Proof: in a survey conducted by the California Association of Realtors(R), 79 percent of people who bought a home in 2012 said the mortgage interest and property tax deductions were "extremely important" to their decision to buy. The ability to write-off interest on up to $1 million of mortgage debt shifts the affordability equation and makes buying more financially compelling than renting for thousands of home owners every year.

So it shocks and surprises me every time I read the numbers of home owners who simply don't take the mortgage interest deduction every year. According to the American Institute for Economics Research, only about 63 percent of home owners itemize deductions – a pre-requisite to taking the mortgage interest deduction and its cousin, the property tax deduction.

Now, there are a number of home owners whose income tax liability is simply so low that itemizing their tax deductions doesn't pencil. That just means that some people's holistic financial picture, including the income they earn and the mortgage interest they deduct, renders the standard deduction larger than the tax break they would receive by virtue of the mortgage interest and other itemized deductions. However, my personal experience has been that many home owners who could be eligible for great benefits from itemizing don't fully appreciate or simply don't feel up to the task of determining whether they have sufficient non-mortgage related deductions to itemize, so they do their own taxes and just take the standard interest deduction to minimize the work.

If you have a high mortgage or property tax bill, it might be obvious that itemizing makes sense. But if not, you owe it to yourself – and your bank account – to at least try working with a tax preparer or committing to spend the time and energy it takes to explore the question of whether itemizing makes sense. Even an extra thousand dollars or two in tax savings can make a big difference to your savings and your financial future, over time.

3. CODI Income Tax Exemptions
Again, 2013 was a year in which many home owners – or former home owners – took pains to use their newly stable incomes to heal the financial wounds of the recession. For many, this involved settling debts with former lenders on homes that were foreclosed, short sold or even retained with defaulted second loans or home equity lines of credit.

Normally, defaulted mortgage debt that is forgiven through a foreclosure, short sale, deed in lieu of foreclosure or settlement via partial payment is actually charged to a taxpayer as income. It's called Cancellation of Debt Income, or CODI. Under the 2007 Mortgage Debt Forgiveness Relief Act ("the Act"), though, the IRS has temporarily exempted CODI from incurring income tax liability for as many as 100,000 home owners a year,to avoid penalizing home owners for these sorts of settlements and resolutions to upside-down home mortgages.

The Act expired on December 31, 2013 (though talks are ongoing about extending it into this year). If you were one of the hundreds of thousands of American home owners who was able to close a short sale or settle a defaulted home loan in 2013, chances are good that you are eligible to tax advantage of the CODI tax break when you file your 2013 return.

This article originally appeared on Trulia.com

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Tara-Nicholle Nelson is Trulia’s Real Estate Realist helping consumers make real-life real estate decisions smarter. She is the author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." 

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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