interest, like when you buy down your points on a loan before a purchase,” says Ari Dodoh, an accountant based in New York City. “Of course, you can only deduct these expenses if you itemize instead of taking the standard deduction. Schedule A of Form 1040 lists the deductions a homeowner can take.
Real estate owners are exempt from paying taxes on the proceeds of a sale up to $250,000 for singles and $500,000 for married couples. This allows a sale or refinance to yield big dividends after equity has been built up in a property.
The tax advantages are even greater for commercial real estate. There are a wider variety of tax deductions and credits, plus the property earns a higher income flow and the usual equity increase. Most important for commercial property are the depreciation rules, which allow owners to write off the cost of their property over a number of years at a set scale. This causes a tax benefit during the depreciation period because the tax deductions are occurring at the same time that the property value is increasing. “This is the greatest benefit in tax law,†says New York-based CPA Jeffrey Rothstein. Rothstein notes that the depreciation benefits are generally so large that people simply use this tax saving to buy other property.
So if you are a real estate owner, there are a number of things that you can do to increase your wealth. Whether you refinance, trade up, or capitalize on tax savings, one of these options can help you build a foundation for securing your financial future.
THE PERKS OF PROPERTY
The simplest approach to trading up is to first build up substantial equity in the home, and then use the equity as a down payment on the more expensive property.
Refinancing
PROS
Save on mortgage payment interest costs
Cash out money for other purposes like paying down debt
CONS
Can take years to pay off mortgage interest
Closing costs dilute benefits
Can increase mortgage payment
Trading Up
PROS
Allows owner to obtain larger, more expensive property without high cash outlay
CONS
Possible higher mortgage payment
Increased cost of managing larger property
Tax Advantages
PROS
Write off mortgage interest and property taxes
No tax on the proceeds of sale up to $250,000 for singles, $500,000 for married couples
Depreciation on commercial property
CONS
Initial cost of property taxes