Taxes and real estate go together like butter and toast.
Whether a client is buying or selling a home, rental property or commercial property, they need to know the tax ramifications involved.
Taxing situation image via Shutterstock.
This is particularly important for high-income individuals, whose taxes have gone up over the last few years due to tax hikes enacted to help fund "Obamacare."
However, unless a real estate broker or agent is a bona fide tax professional -- for example, has an MBA or other specialized training in taxation -- he or she should not give clients detailed tax advice.
As a real estate professional, you are licensed to help your clients buy real estate, not serve as their professional tax adviser. If you give tax advice and it turns out to be wrong, it could cost the client a bundle of money -- and leave you facing a malpractice lawsuit.
That said, the tax aspects of real estate ownership are something every buyer should understand. Real estate professionals need to understand them as well.
Unfortunately, real estate taxation is complex, and not getting any simpler. Just figuring out something seemingly basic, like how much taxable profit a homeowner earns on a home sale, can be a nightmare (good record keeping makes this much easier).
Things aren't made any easier by Congress, which, for budgetary reasons, has enacted many important real estate-related deductions on a temporary basis, extending them year to year.
For example, we're still waiting to see if the deduction for private mortgage insurance, which expired at the end of 2013, will be extended to 2014. Likewise, the federal tax exemption for forgiven mortgage debt expired at the end of 2013, and has yet to be extended. As a result, short sales have fallen dramatically in 2014.
An excellent source of tax information for homeowners, would-be homeowners and real estate professionals is "Julian Block's Home Seller's Guide to Tax Savings: A Tax Guide for Buyers, Sellers, Foreclosures, Short Sales and More." This is an e-book written by longtime tax expert Julian Block. It covers pretty much everything you need to know, including the home sale tax exclusion, short sales and foreclosures, record keeping, and deductions for homeowners.
This easy-to-read book is full of information you'll have a hard time finding anywhere else. For example:
- The IRS allowed a partial home sale tax exclusion where a single mother claimed she had to move less than two years after she purchased her home because one of her children was subjected to extreme bullying at school. (PLR 20082016.)
- The Tax Court permitted a New Yorker to take a $19,000 theft loss deduction for money and property he gave a fortune teller in an attempt to relieve his depression and other mental problems.
- The courts have permitted a medical expense deduction for installing an indoor pool for use by a homeowner with severe back problems.
All in all, the book is highly recommended.
This will be my last column for Inman News. Thank you for your comments over the past 3 1/2 years. For more information about me or my writings, refer to my website and blog at www.fishmanlawandtaxfiles.com.
Stephen Fishman is a tax expert, attorney and author who has published 20 books, including "The Real Estate Agent's Tax Deduction Guide," "Working for Yourself," "Deduct It!" and "Working with Independent Contractors." His website can be found at fishmanlawandtaxfiles.com.