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Real Estate & Finance News That Affects Your Home                                                     December 2007 - Page 4

 

 DEPRECIATION

Depreciation And How It Works

Taxation of depreciation claimed on real property works as follows:

• For a principal residence on which depreciation was taken up to May 7, 1997, the gain is not taxable as long as it doesn't go over the $500,000 or $250,000 threshold.
• For a principal residence on which depreciation was taken after May 7, 1997, the amount of gain equal to the depreciation taken is taxed at a maximum 25% rate, because that portion of the gain is not eligible for gain exclusion.
• For rental property or second home on which depreciation was taken either up to or after May 7, 1997, the gain equal to the depreciation taken is taxed at a maximum 25% rate. Regardless of whether the property was a principal residence, rental property or second home, the depreciation taken increases the amount of gain upon sale.
  

Keep In Mind: If you've been claiming depreciation for a home office or rental unit, be aware that all depreciation taken after May 6, 1997 is subject to tax when the property is sold. If the home office or rental unit is "under the same roof" (i.e., not a separate unit with a separate entrance) then the entire dwelling qualifies for the $250,000/$500,000 exclusion. Separate units must be allocated a portion of the sales proceeds and thus would be subject to taxation upon sale.

YOUR BUSINESS

Working From A Home Office?

The definition of home office was liberalized beginning in 1999.  Now if you keep records, schedule appointments and carry on other such activities from your home office, some common home office expenses, such as utilities, insurance, repairs, cleaning, and depreciation, may qualify for a deduction, even if you do the actual work in another location.  Be aware, however, any depreciation claimed after May 6, 1997, will be taxed at 25% if the residence is sold for a gain, whether or not the property has been converted to personal use.

Keep In Mind: If you or your family use your home office for non-business purposes, it cannot be claimed on your tax return. To claim home office deductions, the space be used exclusively for business purposes.

VACATION HOMES

Tax Benefits of Vacation Homes

Vacation homes have separate tax rules depending on the owners personal-use days.  A residence is a vacation home if it was used personally more than 14 days or 10% of the days it was rented (if rented more than 140 days).  For a vacation home, all mortgage interest and property taxes are generally deductible, either as rent expenses or as additional itemized deductions.  If there was rent income, other property expenses may be deductible, including depreciation, but only up to the amount of the rent income (losses are not allowed).

Keep In Mind:  For non-vacation rental homes, you may claim rent expense deductions other than interest and taxes, even it results in a loss.  When personal use of a vacation home is involved, deductions are determined by allocating expenses, including interest and taxes, between the rental and personal-use periods.  If you rent your vacation home (or principal residence) for 14 days or less a year, you do not have to pay taxes on that rental income.

LOCAL TAXES

Close To Home

Real estate property taxes, state and local income taxes and personal property taxes are fully deductible.  If you sold or bought property during the year, you may have paid or been refunded real estate taxes without being aware of it.  See your settlement or closing statement for any prorations.

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