Home Selling Tax Tips for Accidental Landlords

I read an article today that I felt was worth passing along as many home sellers are now becoming landlords.  In this article Stephen Fishman, a real estate Tax Expert and Attorney shares some thoughts:

Stephen Fishman:

Due to the precipitous decline in the housing market over the past few years, many homeowners who would otherwise sell their homes are renting them out. This may be because prices are too low, or because they have to move before they can sell due to a job change.

Such accidental landlords should understand that if they rent out their homes too long before they sell them, they could lose the biggest tax break available for most people: the home sale exclusion.

Homeowners who qualify for the home sale exclusion don't have to pay any income tax on up to $250,000 of the gain from the sale if they're single, or up to $500,000 if they're married and file a joint return. Of course, this exclusion is useful only for homeowners who have equity in their homes, not the millions who are "under water" and will receive no profit if they sell their homes.

To qualify for the exclusion, a homeowner must satisfy the ownership and use tests. This means that during the 5-year period ending on the date of the sale, the homeowner must have:

• owned the home for at least 2 years (the ownership test), and
• lived in the home as a primary residence for at least 2 years (the use test).

However, the homeowner need not be living in the house at the time it is sold. The two years of ownership and use may occur anytime during the five years before the date of the sale.

This means that a homeowner can move out of the house for up to three years and still qualify for the exclusion. Moreover, a homeowner can rent out a home and count that time as ownership time.

This rule has a very practical application: A homeowner may rent out a home for up to three years prior to the sale and still qualify for the exclusion. However, the exclusion works a bit different for homeowners who have rented out their homes.

They cannot exclude from their income the part of their gain equal to the depreciation they claimed (or could have claimed) while renting the home. Moreover, if the home is rental property at the time of the sale, the sale must be reported to the Internal Revenue Service on Form 4797: Sales of Business Property.

Example: Connie purchases a house on Feb. 1, 2007, and lives in it for two full years. She then moves to another state to take a new job. Rather than sell the house in a down market, she elects to rent it out.

If she sells the house by Feb. 1, 2012, she'll qualify for the $250,000 home sale exclusion because she owned and used the house as her principal home for two years during the five-year period before the sale. If she waits even one more day to sell, she will get no exclusion at all.

Thus, accidental landlords who have equity in their homes need to sell them before the three-year rental period expires, or they'll lose the home sale exclusion. If they can't or don't want to sell, they would have to move back into the home to preserve the exclusion.

Homeowners who don't qualify for the exclusion will have to pay a 15 percent capital gains tax on their gain from the sale (assuming the home was owned for at least one year).

10 Tax Deductions for Realtors or Brokerages

I wanted to pass along this wonderful article. If your like me and in this business, then more now than ever its vital to keep each and every penny earned as the business is far from that one would compare to "easy money". Hope this article comes to you as useful as it came to me!

10 tax deductions: in time for the April 18 deadlineReal Estate Tax Talk
By Stephen FishmanInman News™
March 18, 2011

Your tax return is due by April 18, 2011 (the deadline was extended three days this year because of weekends and holidays).

If you haven't filed yet, make sure you haven't forgotten the following 10 tax deductions, which are often overlooked by real estate agents and brokers.

1. Business clothing with logos: You can deduct clothing you buy for business use only if it can't be used for ordinary street wear. This means you can't deduct a regular business suit. However, you may deduct the cost of a sport jacket, coat or other clothing item with a company logo on it.

2. Car expenses if you take standard mileage rate: If, like most small businesspeople, you use the standard mileage rate to deduct your car expenses, you get to deduct 50 cents for every business mile you drove in 2010. You don't get to separately deduct the cost of gas, insurance, depreciation and similar items because these are all included in the standard mileage rate.
However, you can still deduct certain expenses, including the interest you pay on a loan for your business car, parking and tolls. However, you can't deduct the cost of parking tickets.

. Home telephone expenses: You get no deduction for a single phone in your home; but you may deduct the cost of long-distance phone calls and special phone services you use for business such as call waiting or message center. You may deduct the full cost of a second phone line you use at home for business, including a cell phone.

4. Business gifts: Gifts you purchase for clients are deductible as a business expense, but the deduction is limited to $25 per person per year. However, the $25 limit applies only to gifts to individuals.
It doesn't apply if you give a gift to an entire company, unless the gift was intended for a particular person or group of people within the company. Such companywide gifts are deductible in any amount, as long as it is reasonable.

5. Continuing-education courses: You can't deduct the education expenses you incur to qualify for a new business or profession. For example, you can't deduct the cost of studying for your real estate license.
However, you can deduct the cost of continuing-education courses you must take each year to maintain your license. Education that improves your knowledge and skills as a real estate professional is also deductible -- for example, you can deduct the cost of a webinar on how to use social media to find sales prospects.

6. Tax-preparation fees: You can deduct the cost of hiring a tax professional to prepare your business tax return. If the same tax pro prepares your personal and business return, you can deduct only the cost of preparing the business portion. Make sure that you get an itemized bill showing the portion of the tax preparation fee allocated to your business.

7. ATM fees, credit card fees, and interest: You can deduct ATM fees, credit card fees and other bank charges you paid during 2010 for all your business accounts.

8. Subscriptions: Real estate-related magazines and trade publications are deductible. You can also deduct the cost of subscribing to an online real estate news service.

9. Greeting cards: Greeting cards you send to clients and sales prospects are a deductible advertising expense.

10. Websites: You can deduct the cost of designing and maintaining a website you use for business. You can also deduct your Internet hosting fees and the cost of obtaining a domain name for your business.