The Tax Man Cometh

A few weeks ago, this column revisited a subject we’ve touched on before:  From a comparative point of view—and despite all its recent, well-publicized woes—real estate is still one of the most productive long-term investments a person can make.

As we have in the past we included a graph—courtesy of real estate expert Steve Harney—comparing returns on investment for real estate versus the Dow, S&P and NASDAQ.  The updated graph—which covers the twelve years beginning January 2000—shows that had you invested $100 in each early that year, by now you would have netted $140 in real estate, $112 on the Dow, $90 on the S&P and $70 on NASDAQ (Source: MSNMoney.com, Case Shiller—updated 01/01/12).  Plus, you have the incalculable benefit of owning a home to be lived in and enjoyed for the duration.

Since then, we’ve heard a chorus of voices from the mainstream media chime-in on the same theme. This past weekend, the Sarasota Herald-Tribune became just the latest to suggest that now may well be the time to buy Sarasota real estate.  In his Sunday column, real estate reporter Harold Bubil quoted Ted Jones—chief economist of Stewart Title—as saying that real estate has been a much better income-producing asset than stocks over the past decade.  Jones, who holds a Ph.D in economics, explained to an audience at the Sarasota Association of REALTORS® why real estate is not just a good investment, but a great one.  “Overweight your investment in real estate,” he advised them.  “It is cheap and on sale.”

Dr. Jones also drove home the point that investors who own rental properties are enjoying “a ‘heckuva’ return today.”  His was a reference to today’s unquenchable demand for top quality residential rentals and the profits it is bringing their owners, to whom tenants are paying ever-increasing monthly rents.

Now as we enter tax season comes a reminder that certain tax codes also benefit residential property owners. Irrespective of how and where you file your tax return, there are three basic deductions to always be aware of.

1. Deduction for interest paid on the mortgage for your primary residence. At the beginning of each year, your lender is required to issue you a statement of the interest paid on your home mortgage during the previous year.  Every penny of that interest is deductible, provided the property is your primary residence.  Plus, if you purchased the home in 2011, it’s possible you also paid some “advance mortgage interest.”  If so, the deductible amount is included on the Hud1 statement you received at closing.

2. Property tax deduction on your primary residence.  This may be a tad more complicated, as not all items on your property tax statement qualify as deductions.  According to the Sarasota County Tax Assessor’s office:  “If you itemize your deductions, you may deduct the Ad Valorem tax portion of your bill. However, the non-ad valorem assessments on your bill may not be deductible.”  According to the IRS, you may “Include taxes (state, local or foreign) you paid on real estate you own that was not used for business, but only if the taxes are based on the assessed value of the property.”  (Find out more at SarasotaTaxCollector.com, or at irs.gov)

3. Deduction for “points” paid to mortgage lendersThe term “points” describes certain fees paid at closing to obtain a mortgage. Points are considered prepaid interest and may be deductible if you itemize your deductions.  You may also be able to deduct points paid on a refinance of your home loan, but the deduction must be taken over the life of the new loan instead of all in one year. NOT deductible are items that are usually stated separately on the closing settlement sheet such as appraisal, inspection, title and attorney fees.

Depending on your own particular circumstances, you may be entitled to numerous other deductions related to the purchase of a home or investment property during any given tax year.  However, based on the ever-changing complexities of federal, state and local tax codes, it is always strongly recommended to consult an experienced tax professional before claiming your rightful deductions.

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