Real Estate Tips for the Small Businessperson
By Walt Harvey (R), ABR, CRS, GRI, SRES, e-PRO
Tax time is looming! Not our favorite subject but since real estate is one of the last great "tax shelters" a discussion seems timely.
Three caveats are in order. One: "a real estate broker is the person qualified to advise on real estate transactions. If you desire legal or tax advice, consult an appropriate professional." Two: "Never make a decision solely on the tax consequences." I’m not sure who said that but it makes sense. Three: Federal tax codes differ from Hawaii State tax codes. Again, consult with your tax professional. Having made those disclosures, let’s consider how real estate can reduce your Federal tax burden.
The government has determined that home ownership is a good thing. In general, homeowners tend to bring stability to an area. They tend to make improvements on their homes, thus benefiting the local economy. homeowners tend to take more of an interest in their neighborhood, the local schools, the Neighborhood Boards and they tend to vote. So the government has given homeowners a tax advantage over renters. Property taxes and the mortgage interest are deductible on Schedule A. Many times, depending on your tax bracket, this deduction may offset the difference between owning and renting. (Again, consult with your tax advisor).
In a rising market, home values increase and a benefit of home ownership is the ability to tap equity when needed for business expansion, home improvement, college education or anything you want. In a declining market remember, we all have to live somewhere! Ride out the cycle, it always changes sooner or later. In recent years, many homeowners have "earned" more in equity appreciation than they "earned" in their business or their jobs.
Best of all, the Federal rules allow you to sell your primary residence and keep up to $250,000 profit (if single) or $500,000 (if married) tax free! No "rollover" requirements, no age requirements and you can do this every two years! Consider the possibilities of buying a "fixer’, moving in and improving it and selling in two years. The profit, including "sweat equity" is tax free, subject to the limitations above. For the home to qualify as a primary residence you must own and live in it for two of the last five years. Ownership alone does not qualify, you also must have lived in the home.
Next month we’ll discuss the tax benefits of owning rental property.
Published in Small Business News, March 2004