Real estate lawyer Robert Baudoin, who has helped more than 500 clients including a former NFL star, says he’s been helping more than 50 clients this year, and he’s got a big idea for another 50: If you want to maximize your tax savings and get a good deal on your real estate investments, start by understanding the legal requirements of the industry.
The basics, of course, are simple: It’s important to know what you’re getting into, Baudin says.
The more you know, the better.
“We’ve never been able to do a better job than anybody else,” he says.
“It’s hard to know exactly what’s going on, so it’s a very good idea to understand what’s expected of you.”
If you’re trying to sell your home or rental property to someone who wants to build a rental property, it’s important for you to understand the tax implications of your property, too.
It’s a different legal structure than the one most of us use to buy a home or rent a home, says Baudins partner John Laughlin, an attorney at the Tax Center, a nonpartisan nonprofit group in Washington, D.C. “That’s where it gets interesting,” he explains.
The tax law is complex and you’ll need to understand it to make an informed decision.
“If you buy a house or a condo, you’ve got to understand all of that before you do anything else,” Baudinas partner Laughlin says.
The first step is to learn how your tax situation compares to other home buyers.
“The way to look at it is to compare what you paid for it versus what you would get for it,” Bautista says.
If you paid a premium for your home, then you should consider buying the house at a discount, or at least a lower price.
That means paying more to the seller and the less to the buyer.
If you bought your home for less than the appraised value, you’ll likely get a lower tax bill than if you bought it for more than the price, Laughlin explains.
The difference, of note, can be significant, depending on the city you live in and the state you’re in.
Baudins practice includes real estate law in Florida and New York, and a few other states.
He’s also the founder of the tax-deferred retirement plan, Tax-Reds-Free Retirement, which helps you retire early without taxes.
And he’s a registered Republican.
In general, real estate attorneys believe that there are several tax breaks that real estate owners have to pay for, says Laura D’Antonio, a realtor who writes the Real Estate Blog for Real Estate Board of California.
“Many people think of real estate as a very safe investment,” she says.
However, in reality, there are many other taxes that can affect your property.
In most states, realtors must report the amount of real property they sell, and the federal government does not require them to disclose how much they paid for the property.
The federal government also prohibits the practice of buying homes in the U.S. that are listed on foreign exchanges.
“It’s a tricky situation, because there are some states that don’t require you to disclose that,” Laughlin notes.
In many states, if you sell a property for more then the appraized value, there is a tax deduction.
In most states that allow for deductions, the amount is usually less than 50 percent of the appraiser’s price.
In Florida, it can be 50 percent.
If your realtor can sell the property at a discounted price, the tax deduction is usually 10 percent of that.
But if you have a large sale, that deduction can be 20 percent of your purchase price.
“There are a few things you should look at, like what’s in your best interest,” Baukes partner Lau says.
In some states, a mortgage interest deduction is allowed.
The deduction is typically 50 percent on the first $300,000 of a mortgage.
In some states where you can deduct the mortgage interest, the maximum deduction is 10 percent.
The IRS says that the tax advantage you gain from the mortgage is usually more than enough to justify your purchase.
The real estate broker, however, says you can avoid the deduction by buying the home with an “unconventional” financing structure, like a mortgage-backed security or a home equity line of credit.
“Those aren’t typically listed as tax-deductible,” Baus says.
So if you want a tax break, Bautans advice is to find a broker that is upfront about the benefits and the risks of their services.
“You have to be prepared for some of the unknowns,” Lau explains.
“Some of these deals may not even be tax deductible.”
For more tips on avoiding taxes, visit Real Estate Today.