J.K LASSER’S™ HOMEOWNER’S TAX BREAKS Look for these and other titles from J.K LasserTM—Practical Guides for All Your Financial Needs J.K Lasser’s Pick Winning Stocks by Edward F Mrkvicka, Jr J.K Lasser’s Invest Online by LauraMaery Gold and Dan Post J.K Lasser’s Year-Round Tax Strategies by David S DeJong and Ann Gray Jakabin J.K Lasser’s Taxes Made Easy for Your Home-Based Business by Gary W Carter J.K Lasser’s Finance and Tax for Your Family Business by Barbara Weltman J.K Lasser’s Pick Winning Mutual Funds by Jerry Tweddell with Jack Pierce J.K Lasser’s Your Winning Retirement Plan by Henry K Hebeler J.K Lasser’s Winning With Your 401(K) by Grace Weinstein J.K Lasser’s Winning With Your 403(B) By Pam Horowitz J.K Lasser’s Strategic Investing After 50 by Julie Jason J.K Lasser’s Winning Financial Strategies for Women by Rhonda Ecker and Denise Gustin-Piazza J.K Lasser’s Online Taxes by Barbara Weltman J.K Lasser’s Pick Stocks Like Warren Buffett by Warren Boroson J.K Lasser’s New Tax Law Simplified 2004 J.K Lasser’s New Rules for Retirement and Tax by Paul Westbrook J.K Lasser’s Small Business Taxes by Barbara Weltman J.K Lasser’s Investor’s Guide by Elaine Floyd J.K Lasser’s Choosing the Right Long-Term Care Insurance by Ben Lipson J.K Lasser’s Winning Ways to Save for College by Barbara Wagner J.K Lasser’s Financial Basics for Business Managers by John Tracy J.K LASSER’S™ HOMEOWNER’S TAX BREAKS Your Complete Guide to Finding Hidden Gold in Your Home Gerald J Robinson John Wiley & Sons, Inc Copyright © 2004 by Gerald J Robinson All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993, or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Robinson, Gerald J J.K Lasser’s homeowner’s tax breaks : your complete guide to finding hidden gold in your home / Gerald J Robinson p cm ISBN 0–471–44433–2 (pbk) Income tax deductions—United States—Popular works Homeowners— Taxation—Law and legislation—United States—Popular works Real property and taxation—United States—Popular works I Title: JK Lasser’s homeowner’s tax breaks II Title: Homeowner’s tax breaks III Title KF6385.Z9R63 2004 343.7305'23—dc21 2003014210 Printed in the United States of America 10 About the Author erald J Robinson, Esq., tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars He received his BA degree from Cornell University, an LLB from the University of Maryland, and an LLM in Taxation from New York University Prior to entering private practice, he served in the Office of Chief Counsel, Internal Revenue Service He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition, and wrote the monthly newsletter, “Real Estate Tax Ideas,” both published by Warren, Gorham & Lamont He is also a frequent lecturer and contributor to various professional journals He hates to pay taxes G v Acknowledgments he author is indebted to colleagues and friends for their encouragement and help in moving the idea of a homeowner’s tax guide from concept to reality Two of them deserve special thanks for their willingness to review the manuscript and offer helpful suggestions: Arnold Y Kapiloff, Esq., of the New York City law firm of Schwartzman, Garelik Walker Kapiloff & Mann, P.C., and Richard Sonet, C.P.A., a tax accountant associated with the New York City accounting firm of Marks, Paneth & Shron LLP Their willingness to bring their knowledge and expertise to a review of the manuscript is much appreciated The professionalism and helpfulness of the J.K Lasser staff in the preparation of the book also merits acknowledgment Working with them was a pleasure and their suggestions have made the book both more comprehensive and readable Particular thanks are due to my editor, David Pugh For all of these contributions, my sincere thanks T vii Taxes reflect a continuing struggle among contending interests for the privilege of paying the least Tax philosopher Louis Eisenstein, in The Ideologies of Taxation Homeowners won Tax Attorney Gerald J Robinson, author, J.K Lasser’s Homeowner’s Tax Breaks 226 227 228 229 230 231 232 233 234 Index AARP website, 173 Acquisition indebtedness, 19–21 Adjusted basis value, gain in excess of, 88–89 Adjusted gross income, 165 Alternative minimum tax, real estate tax prepayment and, 19 Appraisal: for casualty loss deduction, 27–28 for rental conversion, 140 At-risk rules, 165 Business expenses: commuting, 45–46 home office deduction, 38–39 Business owners, eligible for home office deduction, 33–34 Bypass trust, 183 Car loan interest, 50–54 Carryovers: capital losses, 88 divorce and, 121 home office deduction, 42–43 Cash basis taxpayers, Casualty losses: boosting deduction, 26–28 in disaster areas, 28–30 guidelines, 22–23 figuring loss, 24–26 home office deduction, 39–40 insurance and, 24 Charitable deductions, 140–143 Closing costs: incidental, 12–14 real estate tax payment and, 5–6 Commuting costs, 45–46 Condominiums, 75, 84 Contract of sale, real estate tax prorating and, 5–6 235 236 INDEX Co-op apartments, 75, 84 Credit card interest, 50–54 Credit shelter trust, 183 Death: step-up home value, 88, 99 unrealized gain, 79, 82 Deferred sale, unrealized gain, 99 Delinquent real estate taxes, 5–6, 15 Depreciation: home office deduction, 40–42 vacation home rental property, 160–164 Disabled, home improvements for, 57–58 Disaster losses, 28–30 Distance rule: moving expenses, 11 unrealized gain, 77 Divorce: $500,000 exclusion, 81 ownership and use rules, 116–117 sale prior to, 118–119 vacation home and, 119–120 tax traps and, 120–122 transfer of home to spouse, 117–118, 122 unforeseen circumstances test, 79 Drought damage, 23 Election out, 62–63 Employees, eligible for home office deduction, 30–32 Employment change, unrealized gain, 75–77, 79 Equipment: home office, 47 vacation home, 162 Equity: reverse mortgage, 66, 173–177 trade-downs, 170–173 trade-ups, 134–135 Equity stripping, in home equity loans, 53 Estate planning, 178–179 current law, 178, 180–182 qualified personal residence trust, 187, 191–194 sale and leaseback, 187–191 title issues, 12, 179–180, 182 vacation home, 184–186 Exchange of property: investment property, 132–134 triangular transfer, 128–132 unrealized gain, 107–108 Exclusive use tests, for home office, 33 Expenses: home office, 30–47 maintenance, 64–65, 138–140, 149, 155–156 moving, 4, 11–12, 15 Fannie Mae web site, 175 Federally-declared disaster areas, 28–30 First-year deductions: checklist for, 14–15 closing costs, 4, 12–14 mortgage points, 4, 7–11, 14, 15 moving expenses, 4, 11–12, 15 real estate taxes, 3, 4–6, 14, 15 title issues, 4, 12, 14 Flipping, in home equity loans, 53 Gift and leaseback, 189 Ground rents, 100 Health problems, unrealized gain, 76, 77–78 INDEX High-priced home, unrealized gain, 96–99 conversion to rental and exchange, 107–108 deferred sale, 99 installment sale, 103–106, 109–115 leasehold carve-out, 100–103 Home equity loans: about, 50–51 business use of, 62–63 cautions about, 51, 53 costs of, 51–52 interest deduction and, 21 in retirement, 170 tax reduction with, 50, 52 trade-ups and, 134–135 Home improvements: as business, 137–138 tax benefits and, 135–137 Home office, 17, 30 commuting costs and, 45–46 eligibility of business owners, 33–34 eligibility of employees, 30–32 figuring deduction, 34–43 flowchart, 31 office equipment costs, 47 outside of home work and, 43–45 “sideline” business, 59–60 unrealized gain, 85, 93 Home ownership benefits, House hopping, see Home improvements Imputed income, 144–146 Installment sale, unrealized gain, 103–106 loan repayment table, 109–115 Insurance: casualty losses, 24 casualty losses, federal disaster areas, 28–30 Interest, see also Mortgage interest credit and car loan, 50–54 home equity loan, 21 Internal Revenue Service, avoiding reporting sale to, 91–94 Internal Revenue Service forms Form 8829, 35, 37 reporting sale or exchange of residence, 94 Schedule C, 35, 36 Investment property, 132–134 Joint ownership: estate planning, 179–180, 182 purchase year, 4, 12, 14 Land, vacant, 85–86 Leaseback, see Sale and leaseback Leasehold carve-out, 100–103 Level payments self-amortizing note, 106, 109–115 Line of credit, see Home equity loans Loans, see Interest; Mortgage; Reverse mortgage Loopholes: appreciated property trade-up, 134–135 charitable deductions, 140–143 home improvements, 135–137 imputed income, 144–146 land including house and investment property, 132–134 loss on sale of home, 138–140 serial sales, 125–128 vacation home bought from sale of rental property, 128–132 Losses, see also Casualty losses carryover for capital losses, 88 237 238 INDEX Losses (Continued) home sale and, 71 vacation home, 150–153 vacation home, full-year rental, 148, 157–165 Maintenance expenses: home rental and, 64–65 vacation home rental, 149, 155–156 ways to deduct, 138–140 Marriage: $500,000 unrealized gain, 79–83 estate tax and, 178, 182–184 title issues, 4, 12, 14 Medical home improvements, 54–57 Mortgage, exchange of property and, 130, 131–132 See also Mortgage points; Mortgage interest; Reverse mortgages Mortgage interest: government threat to, 16–17 home rental and, 64 qualified as deduction, 7–11, 15, 19–20 refinanced loans, 20–21 vacation home and, 149, 153, 155 versus service charges, Mortgage points: deduction of, 4, 7–11, 14, 15 flowchart, 10 for refinancing, 21 Moving expenses, 4, 11–12, 15 Multiple births, 79 Net lease, 108 Nondeductible points, amortization of, Nonforeign affidavit, 15 Packing, in home equity loans, 53 Passive loss rules, vacation home, 164–165 Personal expenses, home office, 38–39 Personal property, depreciation, 162 Personal use, of vacation home, defined, 152, 160 Points, see Mortgage points Preemptive sale, 99 Prepayments, real estate taxes, 18–19 Principal residence requirement: low tax states and, 86–87 serial sale strategy, 125–128 tax traps and divorce, 120–122 unrealized gain, 83–84, 86–87 Property exchange, see Exchange of property Property split, see Leasehold carveout Purchase year, see First-year deductions Qualified personal residence trust, 187, 191–194 Qualified terminable interest property (QTIP) trust, 183 Real estate taxes: first year of purchase, 3, 4–6, 14, 15 home rental and, 64 prepayment of, 18–19 recurring deduction for, 17–19 vacation home and, 149, 153, 155 Record-keeping: adjusted basis of home value, 88–89 INDEX closing costs, 12–14 gain on home sale, 71–72 Recurring deductions: casualty losses, 22–23 home office expenses, 30–47 maximizing, 17 mortgage interest, 19–21 real estate taxes, 17–19 Refinancing, 20–21 Remainder interest, 140–143 See also Retained interest Renovation, see Home improvements Rentals: after trading down, 172 conversion to, 138–140 conversion to, and exchange, 107–108 deductions for, 90–91 depressed markets and unrealized gain, 90–91 employers and home offices, 32 exchange of property, 133–134 leasehold carve-out, 100–103 of part of home, 64–65 of vacation home, entire year, 148, 157–160 of vacation home, fewer than 14 days, 48–49, 148, 149–150 of vacation home, more than 14 days, 148, 150–157 serial sale strategy, 125–128 tax advice and, 62 Residency, see Principal residence requirement Retained interest, see also Remainder interest sale and leaseback, 188–190 vacation home, 185, 192–193 Retirement homes, exchange of property, 131 Retirement planning, 169–170 equity trade-down, 170–173 installment sale, 103–104 reverse mortgage, 66, 173–177 Reverse mortgage, 66, 173–177 benefits, 174–175 disadvantages, 177 Sabbaticals, residency requirements and, 74 Sale and leaseback, 187–191 Sale of home: $250,000 excluded, 71–72 $500,000 excluded, 79–83 checklist, 95 depressed housing market and, 90–91 divorce and, 116–122 gains in excess of , 88–89 government rationale for, 69–70 high-priced homes, 96–115 home office, 85 IRS reporting avoidance, 91–94 principal residence requirement, 83–84 qualifying for, 72–75 qualifying for, exceptions, 75–79 record keeping for, 71–72 serial sale to shield unrealized gain, 125–128 snowbirds, 86–87 vacant land, 85–86 Second home, see Vacation home Second mortgage, 51 Second refinancing, 21 Separation, see Divorce Serial sale strategy, 125–128 Service charges versus interest, mortgage point deduction, “Sideline” business, 58–60 239 240 INDEX Snowbirds, unrealized gain, 86–87 Special-situation deductions: credit card/car loan interest, 50–54 home equity used for business, 62–63 medical home improvements, 54–57 renting part of home, 64–65 retirement nest egg, 66 short-term rentals, 48–49 “sideline” business, 58–60 tax advice, 61–62 Split gifts, vacation home, 184–186 Step-up rule, unrealized gain, 88, 99 Swimming pools, 55–56 qualified terminable interest property (QTIP) trust, 183 Two year ownership/waiting period, for home sale exclusion, 72–75 See also Time rules $500,000 exclusion, 79 divorce and, 116–118 exceptions to, 75–79 rentals and, 90 serial sale strategy, 125–128 Taxable gain, reducing on future sale, 13–14 Tax advice, deductibility of, 61–62 Tax basis, incidental closing costs, 13–14 Telephone lines: home office deduction, 39 for tenants, 65 Termite damage, 22 Time rules, see also Two year ownership/waiting period moving expenses, 11 serial sale strategy, 125–128 unrealized gain, 72–79, 90 Titles: estate planning issues, 179–180, 182 married couple issues, 4, 12, 14 Trade-downs, 170–173 benefits, 172–173 disadvantages, 172 Trade-ups, 134–135 Transfer and recording taxes, 15 Transportation expenses, 45–46 Triangular transfer, 128–132 Trusts: qualified personal residence trust, 187, 191–194 Vacant land, unrealized gain, 85–86 Vacation home, 147–148 depreciation, 160–165 divorce and, 119–120 estate planning issues, 184–186 line of credit and, 51 maintenance costs, 139 mid-year change in use, 159 purchased from sale of rental property, 128–132 qualified personal residence trust, 187, 191–194 rented entire year, 148, 157–160 rented fewer than 14 days, 49, 148, 149–150 rented more than 14 days, 148, 150–157 residency requirements, 74–75 serial sale strategy, 125–128 short-term rental deduction, 49 unrealized gain, 83–84, 119–120 used exclusively by owner, 148–149 Unforeseen circumstances, 78–79 Uniform Settlement Statement, Wills, see Estate planning ... Tracy J. K LASSER’S™ HOMEOWNER’S TAX BREAKS Your Complete Guide to Finding Hidden Gold in Your Home Gerald J Robinson John Wiley & Sons, Inc Copyright © 2004 by Gerald J Robinson All rights reserved... Henry K Hebeler J. K Lasser’s Winning With Your 401 (K) by Grace Weinstein J. K Lasser’s Winning With Your 403(B) By Pam Horowitz J. K Lasser’s Strategic Investing After 50 by Julie Jason J. K Lasser’s... J. K LASSER’S™ HOMEOWNER’S TAX BREAKS Look for these and other titles from J. K LasserTM—Practical Guides for All Your Financial Needs J. K Lasser’s Pick Winning Stocks by Edward F Mrkvicka, Jr