Question

Jon received a substantial inheritance from his deceased grandfather, who expressed in his will his desire that Jon invest at least 75% of the money in real estate. Jon is in the market for his first home and plans to make a down payment of 20% of the home's purchase price and finance the rest with a mortgage. Jon wants to purchase some investment property in the form of residential rental real estate and is thinking about starting a real estate development company to convert a 120-acre parcel of raw land, on which he owns an option to buy, into residential building lots ???? Jon exercises the option to buy the raw land, will this be considered a "trade or business" of real estate development and what this means to Jon in terms of the tax treatment of the income he receives on the lot sales? Jon mentions wants to be qualified as a "real estate professional" for tax purposes, is this possible?

Answer 1

1. There are various facts with regard to tax benefits available to consumer considering purchasing or selling home. It involves a huge investment and the government plays a vital role in encouraging the buyers of homes. Hence buyer / seller of homes are provided with various monetary benefits in the form of tax benefits. However these tax benefits can be availed with the certain conditions & restrictions.

In this case Jon wants to purchase his first home. He plans to make a down payment of 20% of homes purchase price & finance rest with a mortgage. There are major tax benefits available in regard to interest expense by a house owner for purchasing home purchase with mortgage. Thus mortgage interest is deductable from the taxable income. But for availing this deduction they need to forgo the standard deduction available to them, & itemize deductions for availing benefits of deductions up to 750000 of mortgage debt from their income taxes.

Moreover for a homeowner property taxes paid are also deductable from taxable income.

There are other expenses eligible for deduction example insurance, depreciation, etc.

On selling property which qualifies as your primary residence the benefits of deduction of capital gains up to 25000 in home appreciation may be done and thus up to this amount of gain there will be no tax at the federal level. If consumer is married & filling a joint return then up to 500000 can be excluded provided all other requirements are met. Homeowner may be eligible for this exclusion only when this home has been used at least 2 out of 5 years as primary residence before sale has been taken.

2. With respect to residential rental real estate owner may deduct mortgage interest & state & local real estate taxes. More over operating expenses with respect to the rental properties are also deducted. Loan origination fees which is paid while financing rental property is treated as a form of interest & hence qualifies for deduction.

Similarly any form of interest whether paid on unsecured loans for the property or interest payment on credit card used for property expenses is deductable from your taxable income.

Licensing fees & rental property taxes & occupancy taxes are made by rental property owner however they are tax deductable. There are various common utilities that can be claimed for tax deduction by consumer.