Now take a fast look at your real estate taxes. If you are selling your house and moving, there are all sorts of special services these days to assist in making a move easier. Like the service outfits (often representing real estate agents) that help you relocate in a new city.
But there's no service to help you with the tax complications of switching residences - except for your accountant and possibly the Internal Revenue Service itself. So it behoves the transferred executive (today's chronic house-jumper), the middle-aged couple seeking smaller quarters (with the kids out on their own), or the retiree going from house to apartment or condominium to bone up on real estate tax rules. This can be profitable.
Actually, the tax collector treats home buyers and sellers with occasional leniency. For example:
Sellers in a bind have been getting a break from the Tax Court. One taxpayer who had his home on the market for a couple of years was allowed to deduct for depreciation and repairs during that period.
Sellers age 65 and over get a sizable benefit. They can sell a house, move to a rental unit or in with the family (making no new real estate buy), and avoid any capital gains tax on the first £20,000 of the sale price less selling costs. This can easily cut any tax by 50% or more.
Sellers and buyers of co-op and condominium apartments get the same tax breaks that go to people changing houses. Thus among other things, they can avoid capital gains when they sell and then buy.
When you sell at a profit you can, of course, sidestep a capital gains tax if, within a year, you buy (and live in) another house costing as much or more than the price you got for the old house. This is basic. But note: If you see something on the market you like, you needn't wait to buy until after you sell. You can sign for the new house (or co-op or condominium) any time within a year before you sell - and still avoid any gains tax.
What's more, if you sell and then build a new house instead of buying a standing one, you have a year and a half following the sale to move in. Not so with the summer house. Tax avoidance under these rules holds good only if you sell your "principal residence" and buy another. So you're taxed on any profit from a vacation-house sale. This holds, too, when you sell your principal residence and buy a costly summer place.
Special rules apply where property is condemned for public use, say to make room for a new freeway. Generally, you're free of tax on any profit if you reinvest in "similar property" by the end of the year following the year of forced sale. Again, you can buy in advance of sale and avoid tax.
But here - for the tax advantage - it needn't be your principal residence. And if you find it hard to buy similar property within the time limit, the IRS often will give you a reasonable extension. In a recent case, a man replaced his condemned property in time but later sold back the new \land as unsuitable. He still got the tax break.
What if you sell your house at a big profit and don't reinvest? You can squeeze the taxable gain by (1) boosting your cost basis, and (2) lowering your net sales price. But this takes some doing.
First, add to the price you paid for the house all capital improvements (new rooms, modern heating, cooling, new shrubs), plus your buyer's closing costs and any architect's fees (skip repairs). Next, cut your sale price by subtracting all sale costs (solicitor's fees, commissions, ad costs). The 5% or 6% broker's fee helps a lot. This is time-consuming (with much dusty record work), but profitable.
Transferee's lament: A transferred executive shouldn't lose a dime on moving expenses. But note: Not only is any loss on a quick sale of his house non-deductible, but if the company makes it up, the payment is taxable income. Maybe the transferee should ask the company for just that much more.
Investment-related deductions are worth close inspection. Some of the tax angles are drawn on thin lines. Sometimes these small windfalls - write-offs for money spent in connection with investments - get lost. This happens even where a businessman or professional pays for professional tax help.
One trouble is that a taxpayer will ship a bulging box of records to his tax adviser at deadline season (which means any time after Mar. 1) and omit some items that he himself doesn't know are deductible. The tax expert may not have time to investigate. Here is a quick rundown:
First, the broad rule: You can deduct any expense that is reasonable and necessary to produce your investment income, or to... see: Portfolio Deductions Will Save You Cash