Practical Real Estates

An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. If you dispose of property in an installment sale, you report part of your gain when you receive each installment payment. You cannot use the installment method to report a loss.

General Rules

If a sale qualifies as an installment sale, the gain must be reported under the installment method unless:

• You elect out of using the installment method

• You are not a qualified accrual method taxpayer

References/Related Topics

• Form 6252, Installment Sale Income (PDF)

• Publication 537 , Installment Sales

• Tax Tips - Real Estate

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Real Estate Tips
Some handy advice for those buying property.

With the main traditional buying season approaching, here are some tips for those of you on the house hunting trail.

1. Don’t be put off by bad weather. It’s a good time to check the potential property for leaks and poor drainage.
2. Visit the area to check out the proximity of schools, nightlife, transport, shopping centres, etc. These can have an effect on your lifestyle, both now and in the future (ie.children).
3. Contact local agents to research recent sale values in the area.
4. Always obtain building and pest reports on any property in which you are seriously interested.
5. Before you buy, get in touch with your potential neighbours, to ascertain suitability and see if there are underlying disputes or problems.

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You may qualify to exclude from your income all or part of any gain from the sale of your main home. Your main home is the one in which you live most of the time.

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

* Owned the home for at least two years (the ownership test)
* Lived in the home as your main home for at least two years (the use test)

Gain

If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

* If you can exclude all of the gain, you do not need to report the sale on your tax return
* If you have gain that cannot be excluded, it is taxable. Report it on Schedule D (Form 1040)

Loss

You cannot deduct a loss from the sale of your main home.

Worksheets

Worksheets are included in Publication 523, Selling Your Home, to help you figure the:

* Adjusted basis of the home you sold
* Gain (or loss) on the sale
* Gain that you can exclude

Reporting the Sale

Do not report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable. Report any taxable gain on Schedule D (Form 1040).

More Than One Home

If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

Example One:

You own and live in a house in the city. You also own a beach house, which you use during the summer months. The house in the city is your main home; the beach house is not.

Example Two:

You own a house, but you live in another house that you rent. The rented house is your main home.

Business Use or Rental of Home

You may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. But you must meet the ownership and use tests.

Example:

On May 30, 1997, Amy bought a house. She moved in on that date and lived in it until May 31, 1999, when she moved out of the house and put it up for rent. The house was rented from June 1, 1999, to March 31, 2001. Amy moved back into the house on April 1, 2001, and lived there until she sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 - January 31, 2003), Amy owned and lived in the house for more than 2 years as shown in the table below.

Five Year Period — Used as Home — Used as Rental
2/1/98-5/31/99 — 16 months
6/1/99-3/31/01 — 22 months
4/1/01-1/31/03 — 22 months
38 months 22 months

Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house.

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The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706). The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2 percent of all Americans.

Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) with a total value under $1,000,000 do not require the filing of an estate tax return. The amount was $1,500,000 in 2004 and 2005. For 2006 through 2008, the amount is raised to $2,000,000.

For additional information, refer to Instructions for Form 706.

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Real estate transfer tax is a tax that may be imposed by states, counties, or municipalities on the privilege of transferring real property within the jurisdiction. Total transfer taxes range from very small (for example, .01% in Colorado) to relatively large (2.2% in the District of Columbia).

Some states have a variety of transfer tax laws which may include specific exemptions for certain types of buyers based on buying status or income level (e.g. Maryland exempts certain “first time buyers” from a percentage of the total or excludes a portion of the property’s sales price from taxation altogether).

Another variation which exists is either the legal requirement to split the taxes between the parties or the local custom to do so. Thus, in Washington, DC, the 2.2% is generally split between the seller and the buyer. Prior to buying or selling, it is advisable to check with the Recorder of Deeds, a Realtor, or title company to confirm a specific jurisdiction’s practices.

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There is a thing called negotiation when it comes to real estate. Before a deal is to be close, the two involved parties should come into mutual terms before both of them sign the contract (one cannot refuse to sign. It won’t be a closed deal if that the scenario). Normally, this happens if the buyer does not agree with the seller’s asking price. Just like thrift shops, you can “haggle” for the price (it works the same way). The buyer first must have a close look at the house so that he/she can point the things he or she thinks is not worth the asking price.

Photo taken from http://www.cartoonstock.com

Real Estate Tips
Some handy advice for those buying property.

With the main traditional buying season approaching, here are some tips for those of you on the house hunting trail.

1. Don’t be put off by bad weather. It’s a good time to check the potential property for leaks and poor drainage.
2. Visit the area to check out the proximity of schools, nightlife, transport, shopping centres, etc. These can have an effect on your lifestyle, both now and in the future (ie.children).
3. Contact local agents to research recent sale values in the area.
4. Always obtain building and pest reports on any property in which you are seriously interested.
5. Before you buy, get in touch with your potential neighbours, to ascertain suitability and see if there are underlying disputes or problems.

Source