Tax Advice for Rental Property Owners - BusinessWeek

While you're not allowed to deduct principal payments on loans, there are a few tactics you can try to reduce your tax liability

My vacation rental business owns 23 properties on which we make over $200,000 in principal payments annually. Since we make $195,000 in annual profit, every year we end up in the hole financially. We take depreciation on the properties, but it doesn't offset our taxes by much. Is there a way to deduct the principal payments we're making on our properties? —D.P., Cartersville, Ga.

No. "You cannot deduct principal payments on loans," says Bill Fleming, a tax partner at PricewaterhouseCoopers. "This is a typical issue with any leveraged investment—especially real estate, since that is nearly always leveraged."

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1031 Exchange Basics

By C. Grant Conness, President, 1031 Alternatives Group

Many investors have asked what exactly is a 1031 exchange, what are the guidelines and timelines, and can you legally defer your capital gains taxes? I thought it would be beneficial to answer some of your most common questions in this article.

What is a §1031 Exchange?

A §l031 Exchange is a transaction in which a taxpayer is allowed to exchange one investment property for another by deferring the tax consequence of a sale. The transaction is authorized by §1031 of the IRS Code.

The IRS Code actually reads: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like kind, which is to be held either for productive use in a trade or business or for investment."

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Housing law changes key capital gains rule

A little-publicized section of a 2008 federal law intended to help homeowners could reduce the amount of capital gains, or profit, that home sellers may exclude from taxation.

Under the previous law, a homeowner could exclude up to $250,000 in capital gains ($500,000 for a couple) from the sale of his principal residence if he had lived there for at least two of the past five years. The period of occupancy didn't have to be successive. It just had to meet the test of two of the past five years.

For example, if the homeowner paid $500,000 for the house, owned it for five years but lived in it for only two years and sold it for $750,000, he would walk away with a tax-free $250,000 gain - cash in his pocket. (For the sake of simplicity, this example doesn't include adjustments that reduce the amount of capital gains.)

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6 Reasons Why It's Still a Good Time to Buy

The housing market is looking healthier. Here are six reasons why now is the time to jump into the market.

1. Uncle Sam is willing to help. First-time buyers (defined as anyone who hasn’t owned a home in the last three years) are entitled to a maximum $8,000 tax credit; interest rates are at record lows; and the Federal Reserve is doing its best to make mortgage loans available. (Sign up for a Webinar to learn more about the home buyer tax credit)

2. People have to live somewhere. About 800,000 new households are formed each year in this country, ensuring that the housing market will tighten, even if the economy doesn’t soar.

3. Borrowers leverage their investment. If you put $10,000 into the stock market and it earns 10 percent, you’ve earned $1,000. If you put $10,000 down on a home and its values increases 10 percent, you’ve made $10,000.

4. When prices come back up, you’ll have instant equity. In parts of the country where foreclosures have driven down prices, better times will mean the price of the home you buy will rise rapidly.

5. Mortgage costs stay the same. If you get a fixed-rate mortgage, the monthly payment stays the same – while everything else, including rent, goes upward.

6. You own it. There is something comforting in the notion that your home is your own. You can paint it any color you want, let the dog run in the back yard and hang a swing for the kids in the front.

Source: The Wall Street Journal, June Fletcher (03/27/2009)

Deducting private mortgage insurance payments

Homebuyers who don't put at least 20 percent down when they purchase a residence usually have to buy private mortgage insurance, or PMI, on that home loan. PMI is a policy that, as a homebuyer, you pay for, but it protects your lender in case you default.

In this tax tip: • Making your PMI claim • Time and residence restrictions • PMI refinancing rules • Income phaseouts

For most, such insurance is simply part of the price of owning a home.

But some homeowners who purchased their primary residences or second homes in 2008 can claim a tax deduction on PMI premiums.

The new tax break was tucked into the Tax Relief and Health Care Act of 2006 and originally applied to policies on home loans taken out in 2007. Almost exactly a year later, PMI-paying homeowners got more good news. At the end of 2007, the PMI deduction was extended to certain premiums paid in 2008 through 2010.

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10 Timely Home-Related Tax Tips

Tax season is upon us, and homeowners everywhere will reap the benefits of tax breaks and incentives. Homeowners and potential home buyers should know what expenses are deductible and the ins-and-outs of new tax laws, says FrontDoor.com.

1. Deduct the interest you pay on your home loan on your tax return. A mortgage interest deduction reduces your taxable income. And because your mortgage payments for the first few years are heavily comprised of interest, they are almost entirely deductible.

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