Estate Taxation & Property Insurance
You may be entitled to a tax break and tax refund(s) if your property (house, vehicle, or business) was affected by natural disasters (flood, hurricane, volcano, tornado, or fire) and you were not fully reimbursed by insurance or FEIMA, as was experienced by some of our clients in the aftermath of Hurricanes Andrew in 1992, Katrina in 2005, Ike in 2008, and Sandy in 2012.
Real Estate taxation is a big niche market for Barry's Accounting Services. The firm provides services to clients in 13 states. Almost every client of the firm owns real estate or share equity, with 85% of the firm's clients owning two or more properties locally and in other states. Hundreds of tax returns are prepared for them and absentee owners annually. You will receive straightforward answers, impeccable service, and results that are unmatched in this industry.
Clem Barry has worked in the real estate industry for many years. He has been practicing taxation for over 25 years, and he is also an insurance broker. He is always busy preparing pre-sale tax projections, pre-foreclosure tax projections, and/or financial statements and 421(a) & (b) city tax exemption audits for real estate owners and their attorneys seeking mortgage modification or maintaining city status.
|Buying any property ("A word to the wise is good enough")
|Make sure you understand the laws of the state(s) or countries. Some states have recourse laws and some countries may allow you to buy a house but not the land.
|Real Estate is market driven. Pay less than 100% of the appraised value (not the selling price) in anticipation of changes in the market or the economy.
|Get your own appraiser and appraisal report.
|Get your own inspector and inspection report.
|Get your own title search company and title search report.
The benefits of owning residential property
|Mortgage interest and property tax are deductible.
|Appreciation in the value of the property.
|Capital gains exclusions of $250,000 or $500,000.
The benefits of owning rental property
|Annual loss deduction of up to $25,000 for active part-time owners.
|Annual loss deduction of 100% for full-time investors earning more than 50% of their salary from real estate as shown on their tax returns.
|The ability of all owners to use OPM to create equity while adjusting debts with appreciation in the property's value and rents from tenants.
It is not unusual for taxpayers to own several rental properties locally and in other states. In order to enjoy the benefits (including the maximum tax breaks) and remain solvent, owners of rental property must be organized and they must operate the property like a business. They must have a system that is designed to record and monitor income and expenses and a plan that can help them maintain cash flow and adequate working capital (resource integration).
The properties at issue are: residential (single family, condos, co-ops, and vacation homes), mixed-use, commercial, industrial, and undeveloped lands. The focus is on bank and creative financing, acquisition, loan origination, packaging, mortgage and insurance underwriting, loan warehousing, adjusted basis, operation, sale-leaseback, leasehold improvement, lease inducement payment, lease-term contracts, uniform capitalization, passive loss, debt restructuring, income from discharged of indebtedness, non-business bad debts, asset impairment, environmental remediation costs, riparian rights, cost segregation vs. total cost, exchange & transfer of rental property in marital dissolution, transfer of property from a parent to a child, Section 121 exclusion for sale of property, Section 1031 exchange of property, contract price, sellers concession, second mortgage, adjusted sale, recapture, installment method of reporting gain, and foreclosure or repossession of property.
1098 for residential & rental property you own
You should receive this form from every bank or mortgage company that
you paid during the year. The mortgage interest, property tax, town
tax, school district tax, county tax, and/or village tax, and points
(loan origination and loan discount fee) that you paid are tax breaks.
If you did not receive a form 1098 statement by January 31, call the
bank or mortgage company for the information. If you own a CO-OP and
you paid the monthly maintenance fee, you are entitled to a proportionate
share of the mortgage interest and real estate tax that the housing
corporation paid on the building (IRC section 216). This is in addition
to the mortgage interest and real estate tax deductions that you have
received from your mortgage company or bank. You must report the actual
figure on your tax return. Tax preparers are not allowed to use estimates
of these amounts on your tax return.
You must report the amount of rent that you actually received or collected
from each property during the year [IRC Sections 61(a)(5), 109, and
856(d)(1)], plus an itemized list of rental expenses that you paid during
the year for each rental property you own (IRC Sections 163, 164, and
212), such as mortgage interest, property tax, school district tax,
county tax, village tax, water, gas/oil, electricity, insurance, eviction
fees, advertising vacant apartment(s), extermination, cleaning and maintenance,
boiler repairs, carpeting, management fees, and travel to the property.
Minor repairs for plumbing, electrical, and carpentry are deductible
in full in the year paid (Treasury regulation 1.162-4). Equipment and
capital improvement such as new boilers, refrigerators, stoves, central
air conditioning, new bathrooms, complete renovation of apartments and
kitchen, including structural improvements made to the property, such
as a new roof, sidewalk, driveway, garage, fence, and basement are depreciated
and deducted annually over a period of 5-15 years [IRC 262 and 280(A),
and Treasury regulation (regs) 1.280A-3(d)(3)]. Lodging, meals, and
utilities that you furnished to a Super and his dependents are treated
as furnished as a condition of employment. These amenities are tax-free
to the Super. They must not be included in his gross income and they
are not deductible by you, the employer [IRC Section 119(a)(2)].
foreclosure, or destruction of your residence
You do not have to pay tax on $250,000 or $500,000 of profit that you
obtain from the sale or destruction of your principal residence by hurricane,
tornado, threats of condemnation, or eminent domain if you own the property
for at least five years and live in it for at least two years. You can
claim this exclusion once every two years (IRC Sections 121 and 1033).
You can receive a reduced exclusion if you sell your residence earlier
and the sale was due to divorce, unemployment, poor health, acts of
vandalism or terrorism, a change in employment, or self-employment status
that makes it difficult for you to pay your mortgage and living expenses.
A reduced exclusion is based on the number of days that you owned and
occupied your residence divided by 730 days, or the number of months
you owned and occupied your residence, divided by 24 months, multiplied
by the exclusion of $500,000 or $250,000 based on your filing status
at the time of the incidence or occurrence.
principle residence was destroyed or condemned, you may have to purchase
a replacement property within two years to offset the recognized gains.
If a lender has foreclosed on your property, your gain or loss for tax
purposes is the difference between the net proceeds that the lender
received at the auction and your adjusted basis in the property [IRC
856(e)(1) and 1001]. Your attorney or insurance company should give
you copies of these settlement papers. Take the documents along with
you at your tax interview.
deduct a maximum of $3,000 on your tax return annually if you paid a
contractor or developer to build your house and you and other homebuyers
lost your money because the contractor filed bankruptcy. This is a non-business
bad debt [IRC Section 166(d)(1)(B)]. To qualify for this non-business
bad debt deduction, you must show proof of contract, original cancelled
check(s), and a letter from the bankruptcy court or from the contractor's
You can avoid losing your money to a contractor or developer by checking
their history for lawsuits and bankruptcies and ensuring that they carry
contractor's general liability insurance (CGL) and Payment & Performance
bonds and your name is endorsed on the policies. I am an insurance broker,
so I know that.
of rental or commercial property
If you sold a rental/commercial property, you may have to pay capital
gains tax on the profit or on the amount of the depreciation taken (IRC
Sections 1231, 1245, & 1250). However, you can avoid paying tax
on capital gains and instead pay tax on ordinary income if you sold
your rental property to a relative (IRC 1239). If you are not qualified
to use this method, then you may use the installment sales method to
spread the capital gains and your overall tax burden over several years
if you received a down payment from the buyer and you hold a note or
second mortgage for the balance of the sale Seller finance (IRC
Section 453). You may also qualify for non-recognition of capital gains
tax through a Section 1031 like-kind exchange transaction. This tax
strategy allows you to reinvest your entire profit into a new property
without paying capital gains tax. Section 1031 exchange transaction
must be completed within 180 days (six months) after the transfer of
the exchange property.
1031 exchange, business, or investment property
In a section 1031 exchange transaction, the property you give up and
the property you receive must be held for investment or for use in your
trade or business. Machinery, trucks, land, office buildings, and rental
houses are examples of qualified property. You can exchange an apartment
building for another apartment building, retail building, or industrial
1031 exchange, principal residence
Section 1031 exchange rules do not apply to property that is used solely
as a personal residence.
If you owned a personal residence for at least five years and lived
in it for at least two years, and the residence was rented out to a
tenant at the time of the exchange, then you can claim both the section
121 exclusion of $250,000 or $500,000 and the Section 1031 non-recognition
of gain. Isn't this a nice loophole?
1031 transactions are complex. It is important that you retain the services
of a real estate attorney to construct your transaction within Section
1031 exchange rules because you can be audited and indicted for tax
evasion. If you need help setting up a Section 1031 transaction, please
call the following tax attorneys.
Law firm of Meltzer, Lippe, Goldstein & Breitstone
Commercial Partners Exchange Co.
write, teach, and practice this subject. They can refer you to other
tax attorneys in your state or city if they are too busy to handle your
assignment. You may also call:
1031 Exchange Services
White Plains, NY
Hi Barry, I am single. I sold my 4-family building in January 2005.
The market price was $800,000, but the contract price was $725,000.
I also gave the buyer $30,000 to help pay the closing cost. I received
the building from my parents in 2004. They bought it in 1982 for $52,000
and made improvements totaling $100,000 over the years. We lived in
one apartment and rented out the other three apartments from 1982 to
2004. My parents filed their tax returns every year and they included
the rents and the operating expenses of the building. They have taken
$85,650 in depreciation deductions. Am I in trouble with the government?
You are not in trouble with the government. You just have to pay the
government what you owe. Gain or loss from the sale or transfer of a
property is the difference between the adjusted selling price and the
adjusted basis (total cost) of the property sold. The basis that your
parents had in the property and the depreciation they have taken over
22 years were transferred to you when you received the property. This
situation also holds true if the property was transferred to you in
a divorce settlement. You do not have to pay capital gains tax for the
apartment where you lived. Your profit for your apartment is $135,750
= ($173,750 - $38,000) and your Section 121 exclusion is $250,000. However,
you have to pay federal and state capital gains tax on the profit/gain
of $492,900 you received from the three apartments that your parents
rented out for 22 years. Your profit of $492,900 was arrived at after
the selling price was adjusted to reflect the seller's concession, your
basis was adjusted, and recapture of depreciation was added back. You
may be able to postpone paying federal and state taxes on $492,900 profit
if you plan to buy a commercial property within two years after the
sale of your property.
Hello Clemson, my wife and I purchased our home for $365,000 at the
height of the market in 2003. The asking price was $380,000. We spent
$17,200 on renovation and our mortgages totaled $390,000. The appraised
value of the house is now $380,000. We could not keep up with the monthly
payments so the lenders foreclosed on the house. The house was sold
at auction for $390,000. Are we entitled to receive money from the foreclosure?
Foreclosures [IRC Sections 108(a), 856(e)(1), and 1001(a)].
The IRS and the tax court have ruled that the value of a property sold
in foreclosure is the amount of money the seller received for it from
the highest bidder. The foreclosure sale has generated a capital gain
of $7,800 ($390,000 - $365,000 - $17,200). The capital gain is not taxable
because your section 121 exclusion is $500,000. You are not entitled
to receive money from the foreclosure sale because the total amount
of your mortgages is equal to the amount the lenders received at the
Hi Clem, I own ten acres of prime land in a busy city. I paid $200,000
for the land in 1978. The current value of the land is $800,000. In
2004, the state acquired a portion of the land and built a highway through
it. I received $80,000, but the market value of the land is $88,000.
Can I take $8,000 as a credit or deduction on my tax return?
Condemnation or eminent domain [IRC Section 1033(a)(2)(E)(ii)].
Real estate can be purchased/acquired at fair market value or at its
appraisal value. The $80,000 you received from the state may be the
lower of the two value systems. Ask the state which value system was
used to calculate your compensation or you can initiate legal proceedings
against the state for the additional compensation of $8,000. Current
tax rules do not allow you to take a tax deduction or credit for $8,000.
The value of the land acquired by the state is 10% of the value of the
ten acres you own ($80,000/$800,000). You received $80,000 and the land
cost you $20,000 (10% x $200,000). You have to pay capital gains tax
because the acquisition has created a net taxable gain of $60,000.
Mr. Barry, I am planning to develop, subdivide, and sell 30 acres of
land that I purchased and held in my name 12 years ago for $156,000.
The value of each lot will vary significantly. The subdivision costs
and fees will be approximately $80,000 and the estimated sales price
will be $2,800,000. I plan to sell all the lots in five years. How should
I structure my transactions to minimize my taxes?
IRC Section 1237.
As an individual owner, you should sell five lots of two acres each
for three years. If you sell more than five lots in the same year, then
5% of the sales price of each lot in excess of five lots will be taxed
as ordinary income. A five-year delay after the sale of the first five
lots will qualify an additional five lots or the remaining lots for
100% capital gains tax. An individual owner who subdivides land and
sells off lots or parcels cannot defer reporting gain until the entire
cost is recovered. The proper procedure is for you to apportion the
cost equitably among the lots so that gain or loss can be determined
on the sale of each lot.
You could save a lot of money if you established a C corporation for
buying, holding, and selling real estate. You transfer, develop, and
sell the land as part of the inventory of the corporation.
Hi Clemson, I bought a beachfront residence with two acres of land for
$1,200,000 in 1993. The value of the land was $125,000. My residence
was damaged by a hurricane in 2003. I had a high insurance deductible
and I properly deducted $20,000 as a casualty loss on my 2003 tax return.
I made $80,000 repairs to the property in anticipation of converting
it to a rental property. The house was rented out in January 2006. The
market value of the property at the time was $1,100,000 and the value
of the land was $100,000. What figure should I use to calculate the
depreciation on the house for tax year 2006?
Treasury regulations (regs) 1.167(g)-1 and 1.168-2(j)(6). IRC Sections
1012 and 1016.
Your basis for depreciation is $1,000,000. When a personal residence
(asset) is converted to business use, the basis for depreciation is
the lower of the adjusted basis (total cost - land - loss) or the market
value (FMV) when the property was converted. The adjusted basis is $1,135,000
($1,200,000 - $125,000 - $20,000 + $80,000). Since the basis of the
house is $1,135,000 and fair market value (FMV) is $1,000,000 ($1,100,000
- $100,000), the basis for depreciation is $1,000,000. You should use
$1,000,000 to calculate the depreciation on your house.
Hi Clem, a contractor wants to accept my residence as a trade-in and
allowed me $340,000 towards a new residence priced at $400,000 that
he owned in another state. I bought my house in 1990 and I have never
rented it out. I have the following pieces of information:
(good faith estimate)
the basis of my new residence in the exchange?
IRC Section 1034(a) and (e); Section 121.
The trade-in transaction you are talking about is Section 1034 transaction.
Section 1034 rules were repealed in 1998. This transaction may cost
you a small fortune in back taxes, interest, and penalty when the auditors
pull your file three years later. Section 1031 like-kind exchange rule
has been the new rule for several years and it does not cover property
used solely as a primary residence. I strongly recommend that you take
out a home equity line of credit to make a down payment on your new
residence while you are searching for a buyer to purchase your current
residence for $400,000. You can then use your tax-free profits or capital
gains of $215,500 to reduce the balance owed on your new residence.
Why tax-free? Because your Section 121 exclusion of $250,000 offsets
your capital gains profit of $215,500.
the answer to your Section 1034 trade-in transaction. IRC Section 1034(e)
requires the basis of a new residence be reduced by the amount of gain
realized on the sale of a former residence. The adjusted basis of your
new residence is $246,500.
of former residence
(135,000 + 46,500 - 2,500)
gain of former residence (realized gain)
1034(a) has provided for the non-recognition of gain in the exchange.
The adjusted basis of the new residence for future tax purposes is equal
to the purchase price of $400,000 + $2,000 attorney's fee less $155,500
of non-recognized gain.
Hi Barry, I bought a one-family residence in June 2005 for $315,000.
I paid 3% down and closing costs of $19,800. The property valued $350,000
at closing. I received $35,000 cash back at closing and my mortgage
was $340,000. I lost my job and I had difficulties paying my mortgage
after my unemployment, severance pay, and savings ran out. I sold my
residence in September 2006. The contract price was $380,000, but I
had to give the buyer a seller's concession of $10,000 to qualify for
a mortgage. I paid $29,200 in selling expenses including a 6% broker's
fee. Am I entitled to receive some money back?
IRC Section 121.
You should have received a check for $800 at closing from the buyer's
mortgage company. Your attorney would have your money in his/her escrow
account. Your capital gains is $6,000. The taxing authorities have recognized
your special circumstance and have exempted you from paying capital
gains tax. You are covered under the reduced exclusion rules. Your reduced
exclusion of $156,250 (15 months/24 months x $250,000) will offset your
capital gains of $6,000. Here are the calculations:
company should pay you ($380,000 - $39,200 - $340,000) = $800
capital gains is ($380,000 - $39,200) - ($315,000 + $19,800) = $6,000
My answers to the questions above can save you thousands of dollars
in taxes. Please remember tax rules are subject to change. Please call
me if you would like to have your tax returns prepared or if the government
is auditing you. If I didn't convince you that I know real estate taxation,
then nobody will be able to convince you that they know it.
article on Real Estate Taxation is excellent. I have read bits and pieces
of the subject in magazines, brochures, and handouts at seminars, but
this is the most comprehensive article I have read on the subject. The
answers you gave were well-researched."
Jan Davidson, General Contractor, Beverly Hills, California
used to live in New York and commute to work in New Jersey and Connecticut.
I rented out my residence in New York and relocated to another residence
I had in Georgia. I sold my residence in Georgia and relocated to California.
I finally sold my residence in New York. Barry's tax planning advice
saved me $18,000 in prepayment penalties, $30,000 in seller's concessions,
and $5,900 in taxes. Barry has been preparing my tax returns and advising
me for 20 years. I could not have chosen a better person to look after
Sylvia Fortune, District Sales Manager, Los Angeles, California
buy and sell real estate. Barry has been our tax advisor for 15 years.
He has saved us an average of $15,000 in seller's concessions, $6,000
in prepayment penalties, and $5,000 in taxes per property."
Eva & Allan Hopkin, Real Estate Investors, Laurelton, New York
was audited and couldn't find my tax preparer. A friend referred me
to Barry. Barry took my case and saved me $5,250. I have become more
educated and realistic about who should prepare my tax returns. Thank
Ray McCloud, Real Estate Owner, Newark, New Jersey