Practical Real Estates

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You must be an expert in the area of real estate. Like an expert on investment real estate said, success is a journey, not a destination. It is only in starting and continuing to do something everyday that people become experts. Practice makes perfect and that is so true. In real estate, you learn something new in every deal that you put together. The lesson you learn every time is different from what you will learn in your second, third, fourth and so on deals mainly because each has different features and characteristics from the next. You learn by doing. Expertise is gained through experience.

The decision to rent or to buy your own home isn’t usually such a difficult decision under normal circumstances. Almost always, it’s better to own your home rather than to rent. Owning your own home allows you to build equity. You even get to write off your mortgage interest and may be eligible for a tax breaks. On the other hand, with the high interest rates and deteriorating property values, it may be a better idea to rent for a while.
Buying property in today’s market may also mean that you should be prepared to hold on to your property for a while, else you lose your principal. Owning your own property also means fees to upkeep the place and property taxes. Renting your home, however, your run the risk of annual rent increase eventually outpacing inflation. In sum, if you have the financial capability to pay for the mortgage and all additional costs, it will still be better to buy your house, but if you are financially hanging by a thread, then renting is the better option for you.

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An estate plan is a legal system for the disposal of your property upon your death. It recognizes your wishes, such as those regarding the care of minors, and it legally minimize taxes. It can take into account your views regarding future medical care; for example, it may state you have no wish to have your life sustained by a life support machine.

Estate planning may or may not involve tax planning. The single most important document associated with estate planning is a will.If you own property, there are basic questions which need to be answered upon your death. If these answers are not set out in the form of a will, then the courts have the right to decide what happens to your assets. The end result may well coincide with your wishes, but often it will not. The value of your estate will be substantially reduced, as professionals such as accountants and lawyers will argue as to what the law of succession means.

Property tax, millage tax is an ad valorem tax that an owner pays on the value of the property being taxed.

There are three species or types of property: Land, Improvements to Land (immovable man made things,e.g. buildings), and Personalty (movable man made things). Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.

There is a form of tax which is often confused with the property tax. This is the special assessment tax. These are two distinct forms of taxation: one (ad valorem tax) relying upon the fair market value of the property being taxed for justification, and the other, (special assessment) relying upon a special enhancement called a “benefit” for its justification.

The property tax rate is often given as a percentage (amount of tax per hundred currency units of property value). It may also be expressed as a permille (amount of tax per thousand currency units of property value), which is also known as a millage rate or mill levy. (A mill is also one-thousandth of a dollar.) To calculate the property tax, the authority will multiply the assessed value of the property by the mill rate and then divide by 1,000. For example, a property with an assessed value of US$ 500,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of US$ 10,000.00 per year.

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Real estate is an investment. As an investment, it is expected to bring you returns either in the form of revenues or to increase its market value. In looking at the return of investment, it is important that you understand the characteristic of the real estate property you invested in.

Knowing what type of property you purchased would give you a better picture of how it would perform in the future for you. It will help you to understand the potential of your property to increase in market value. Here are the typical types of real estate on the market:
1. Income and Non-Income Producing
2. Office Spaces
3. Retail Property
4. Industrial Property
5. Multi-family Residential

Real estate is a legal term (in some jurisdictions, notably in the USA) that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is stationary, or fixed in location. Real estate is often considered synonymous with real property (also sometimes called realty), in contrast with personal property (also sometimes called chattel or personalty). However, in some situations the term “real estate” refers to the land and fixtures together, as distinguished from “real property,” referring to ownership rights of the land itself.

The terms real estate and real property are used primarily in common law, while civil law jurisdictions refer instead to immovable property.

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A real estate broker is a term in the United States which describes a party who acts as an intermediary between sellers and buyers of real estate (or real property as it known elsewhere) and attempts to find sellers who wish to sell and buyers who wish to buy. In the United States, the relationship was originally established by reference to the English common law of agency with the broker having a fiduciary relationship with his clients.

Estate agent is the term used in the United Kingdom to describe a person or organization whose business is to market real estate on behalf of clients, but there are significant differences between the actions and liabilities of brokers and estate agents in each country. Beyond the US, other countries take markedly different approaches to the marketing and selling of real property.

In the US, real estate brokers and their salespersons (commonly called “real estate agents” or, in some states, “brokers”) assist sellers in marketing their property and selling it for the highest possible price under the best terms. When acting as a Buyer’s agent with a signed agreement (or, in many cases, verbal agreement, although a broker may not be legally entitled to his commission unless the agreement is in writing), they assist buyers by helping them purchase property for the lowest possible price under the best terms. Without a signed agreement, brokers may assist buyers in the acquisition of property but still represent the seller and the seller’s interests.

In most jurisdictions in the United States, a person is required to have a license in order to receive remuneration for services rendered as a real estate broker. Unlicensed activity is illegal, but buyers and sellers acting as principals in the sale or purchase of real estate are not required to be licensed. In some states, lawyers are allowed to handle real estate sales for compensation without being licensed as brokers or agents.

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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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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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