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NOTE: Although all real estate licensees must have basic knowledge and understanding of the federal income tax laws affecting real property, they must not give tax advice to buyers and sellers. Because each taxpayer's situation is different, only competent professional tax consultants who are familiar with the taxpayer's position should give advice of this nature. Real estate licensees should recommend that buyers and sellers seek this specialized expertise when appropriate.
HINT FOR THE STATE EXAM You will probably get only a couple of questions on income taxes on the state exam. You should absolutely know the capital gains treatment on a principal residence (exemption of $250,000 if you're single and $500,000 if you're married and filing jointly, and you must have lived in the property for 2 years of the past 5 years). Properties that are not principal residences - taxes must be paid on the full capital gain (there are no exemptions). You should be aware of favorable tax treatment for these transactions through a 1031 Exchange or Starker Trusts. It is unlikely, that you will receive a question that is specifically referencing the mechanics of either.
INFORMATION THAT WILL BE ADDED TO THE 4th EDITION In 2003, another change took place. Congress lowered the long term capital gains rate to 15% if your tax bracket is 25% or higher or 5% if you tax bracket is lower than 25%. Licensees should encourage their clients to the advice a tax professional. --------------- PRIVATE MORTGAGE INSURANCE Private mortgage insurance (PMI) will become deductible for the first time in 2007. There are several serious restraints on its deductability, however. To qualify for the deduction the home for which the PMI policy was purchased must have been purchased after January 1, 2007 and the borrowers must make less then $100,000 in income. Licensees should have their clients consult their tax professional. --------------- In 2003, another change took place. Congress lowered the long term capital gains rate to 15% if your tax bracket is 25% or higher or 5% if you tax bracket is lower than 25%. Licensees should encourage their clients to the advice a tax professional. --------------- Reverse Starkers are also allowed. In a reverse Starker, the new property is purchased before the sale of the property that is to be sold. The sale of the property must take place in 180 days. --------------- Putting It To Work Starker Trusts are complicated and a licensee should have their clients consult their tax advisor well before a sale or in the case of a reverse Starker the purchase. The tax consequences of missing one of the many tax requirements of a Starker can have serious financial ramifications. For instance, the client can violate the trust by filing his income tax before the sale or purchase. A large bank will probably have a department that deal in Starker Trusts. There are many companies that handle Starker Trusts exclusively. Typical fees to set up a Starker around $1,000 and $7,500 or so to set up a reverse Starker. --------------- |
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