The New Year always turns thoughts to the new tax season and when it comes to taxes there’s no place like HOME to find shelter. Your home offers a score of tax deductions and credits designed to help offset the cost of housing. Visit the Internal Revenue Service’s website for more details on each item.

Mortgage Loan Interest:
The Mother Of All Tax Breaks, because interest payments comprises a large portion of your mortgage payment in the early years of the loan’s term, mortgage interest on a maximum of $1 million in mortgage debt secured by a first and second home is deductible. Deductions reduce your taxable income against which your taxes due are calculated. The $1 million level applies to joint tax filers. You get half the deduction if you file single or separately. Likewise, home equity loan interest is deductible, but limited to the smaller of $100,000 (half as much for each member of a married couple if they file separately), or the total of your home’s fair market value as determined by a complicated formula you may need a tax professional’s help to decipher.

Home Improvement Loan Interest:
The interest on a home improvement loan is also deductible, but calculated differently. You can deduct all the interest on a home improvement loan provided the work is a “capital improvement” rather than repairs, maintenance or cosmetic upgrades. Capital improvements typically increase your home’s value (say, because you added a room), prolong it’s life (a new roof) or adapt it to new uses (universal design improvements to assist older people or people with disabilities). You get tax benefits from repair work (painting, repairing, etc.) only when you sell your home but you can use a home equity loan to make repairs and deduct the interest.

Points:
Points, each equal to 1 percent of the loan principal, are charged by lenders as part of the cost of the loan. You can fully deduct points associated with a home purchase mortgage, but not a mortgage broker’s commission. Refinanced mortgage points are deductible too, but only when they are amortized over the life of the loan. Once you refinance a second time, the balance of the old points from a refinanced loan offer an immediate write off, as you begin to amortize the new points.

Property Taxes:
Property taxes or real estate taxes are fully deductible. Any local city or state property tax refunds reduces your federal property tax deduction by the same amount.

Capital Gains Exclusion:
Home buying investors’ best tax shelter comes from provisions in the Taxpayer Relief Act of 1997 which allows married taxpayers who file jointly to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. The amount is halved for those filing single or separately. You can use the benefit as often as you qualify.

Home-Based Business Deduction:
Home offices that use a portion of your home exclusively for business could qualify you to deduct a percentage of costs related to that portion. Included are a percentage of your insurance and repair costs, utility bills and depreciation. Under clarified provisions of the Taxpayer Relief Act of 1997, if your home office qualifies, you don’t have to allocate a home sale’s capital gains between the home and the business. Previously if you used, say, 10 percent of your home for a home-based business, 10 percent of the gain from a sale would be subject to capital gain taxes and you couldn’t use the capital gains tax exclusion on that portion. The clarified provision does not excuse you from a recapture tax if you’ve taken a depreciation deduction because of the home-based business.

Selling Costs and Capital Improvements:
When you sell your home, you can reduce your taxable capital gain by the amount of your selling costs, which include real estate commissions, title insurance, legal fees, advertising and inspection fees. Cost typically stemming from decorating or repairs - painting, wallpapering, planting flowers, maintenance, and the like - are also selling costs if you complete them within 90 days of your sale and with the intention of making the home more saleable. Selling costs are deducted from your gain. Gain is your home’s selling price, minus deductible closing costs, minus selling costs, minus your tax basis in the property. Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.

Moving Costs:
A move triggered by a new job comes with some deductible moving costs. To qualify, you must meet certain requirements including, moving within one year of starting your new job, moving 50 miles farther from your old home than your old job was and working full-time at the new job for 39 of 52 weeks following the move. Deductions include travel or transportation costs and expenses for lodging and storing your household goods.

Mortgage Tax Credit:
Mortgage Credit Certificates (MCCs) allow qualifying low-income, first-time home buyers to take a mortgage interest tax credit of up to 20 percent (the amount varies by jurisdiction) of the mortgage interest payments made on a home. This credit is available every year you keep the loan and live in the house purchased with the certificate. Unlike a deduction that reduces your income, the credit is subtracted, dollar for dollar, from the income tax owed. For example, with a 20 percent tax credit, if you paid $10,000 in interest, your tax credit would be $2,000. If you owe $2,000 in income taxes without the credit, you would end up owing nothing to the IRS after the credit was applied. The remaining 80 percent of your mortgage interest — $8,000 - is taken as a normal mortgage interest deduction.

Energy Tax Credits:
The newest home-based tax credits were made possible last year by the Energy Policy Act of 2005. Tax credits of up to $500 in 2006 and 2007 are available for upgrading heating and air conditioning systems, insulations, windows, doors and thermostats, caulking leaks, installing pigmented metal roofs and for otherwise putting the bite on energy waste in your home. Qualified solar energy and fuel cell systems can net tax credits of up to $2,000. Some states also offer tax credits or rebate deals that could reduce the federal credit. Related tax credits are available for consumers who buy alternative and clean-fuel burning cars and for entrepreneurial consumers who install clean-fuel vehicle refueling property at the principal residence of the taxpayer.

Q: What is Low & Moderate Income Homeowners Property Tax Relief?
A: Chapter 158, Session Laws of 2001, enacted the property tax relief to eligible low to moderate income claimants, who own a homestead in New Hampshire.

Q: How do I qualify for relief?
A: You must own a homestead subject to the state education property tax; have resided in such homestead on April 1 of the year for which the claim for relief is made; have a total household income of (1) $20,000 or less if a single person or (2) $40,000 or less if married or head of a New Hampshire household.

Q: Do I have to pay my property taxes in order to be eligible for relief?
A: No, there is no requirement to have paid your property taxes to receive relief if you are eligible.

Q: Some of my land is held in current use, is that includible in the assessed value of the homestead?
A: No, you must exclude the portion of your property tax bill that relates to land taxed under current use.

Q: When and where do I apply for relief?
A: Completed claims, Form DP-8, shall be filed with the Department no sooner than May 1, and no later than June 30, following the due date of the final property tax bill for state education property taxes.
Mail your claim to:
NH Dept of Revenue Administration
Document Processing Division
PO Box 299
Concord, NH 03302-0299

Q: Where do I get the claim form?
A: Form DP-8, Claim for Low & Moderate Income Homeowners Property Tax Relief, may be obtained annually on or after April 15th from this web site, by visiting your local town offices, or contacting our forms line at (603) 271-2192.

Q: What information will I need to complete the c laim form?
A: You will need your final property tax bill, as defined in RSA 76:1-a, showing the “net” assessed value of your home and a copy of pages 1 & 2 of your federal tax return for each claimant and all adult members of the claimant’s household for the corresponding period.

Q: What information do you need from the tax bill?
A: You will need the map and lot number (which are printed on the property tax bill), account number if your town uses one, and the net assessed value.

Q: What do you mean by the net assessed value?
A: This means the value placed on your home after any exemptions such as elderly or blind exemptions, but not any veterans’ credit.

Q: What if there are multiple names on my tax bill or my ex-spouse is still on my tax bill?
A: You will need to supply written documentation explaining the reason(s) they are on the tax bill.

Q: What if the homestead is owned by two or more people as joint tenan ts or tenants in common and one or more of such joint owners do not principally reside at such homestead?
A: Only one claim may be filed for a single homestead. The tax relief applies to the proportionate share of the homestead value that reflects the ownership percentage of the claimant.

Q: What if an adult member of the household is not required to file a Federal tax return?
A: Check box 11(b) and enter on Line 10(c) the total adjusted gross income of all the adult members of the NH Household, as if they were required to file.

Q: Do I qualify if my homestead is held in a trust?
A: You may qualify if you hold equitable title, or the beneficial interest for life, in the homestead. If the trust is an revocable living trust, you must submit the first and last page of the trust document with your claim. If your homestead is held in an irrevocable trust, or any other trust name, you must submit the ENTIRE trust document in order to determine your eligibility.

Q: How soon will I receive a relief check?
A: The Department will notify the state treasurer to issue the check within 120 days of receiving a valid and complete claim, depending on date of receipt of any pending issues.

Q: Can my claim be rejected?
A: Yes. The Department will notify you, in writing, if your claim is rejected in whole or in part, within 90 days of the department’s receipt of the claim and all required documentation.

Q: What are my appeal rights?
A: If you disagree with the relief amount or denial you may file an appeal with the Board of Tax and Land Appeals within 30 days from the date of notice at: NH Board of Tax and Land Appeals (BTLA), Johnson Hall, 3rd Floor, 107 Pleasant Street, Concord, NH 03301-3834.

Q: What is the appeals process?
A: In order to Appeal your denial and/or your adjusted Notice of Relief, you must write to the Board of Tax and Land Appeals within 30 days from the date of the letter of denial by supplying your legal name, social security number, an explanation or description of your dispute, your position on the matter, a copy of the Notice of Adjustment or letter of denial received from the Department of Revenue Administration, a copy of your most recent deed which establishes ownership in the property and a copy of the assessment card for the property.

Q: Will I receive a form 1099 for my property tax relief?
A: No, federal form 1099’s are not required.

Q: What if I can’t find my federal tax return, can I still file a claim?
A: Yes, provided you obtain a copy from the Internal Revenue Service by calling 1-800-829-1040.

Q: Are there penalties for f alse claims?
A: Yes. The law provides for the repayment of the relief amount including interest and a penalty of 25% for the erroneous amount of such claim or an additional penalty of 25% or $1,000 whichever is greater.

Q: If I use part of my homestead fo r business use can I still be eligible for property tax relief?
A: Yes, but only on the portion of your homestead that is used as your principle place of residence and domicile for purposes of voting.
Land and buildings rented or used for commercial or industrial purposes shall not be included in the assessed value of the homestead.

Q: What if I file my claim after June 30 th , can I still be eligible?
A: The commissioner may accept complete applications filed on or before November 1, provided the claimant satisfies the commissioner that the claimant was prevented from timely filing the application due to accident, mistake or misfortune; or that the claimant or other adult member of the household requested an extension of time to file his or her federal income tax return.

Q: Where do I find the map and lot number you requested on the form?
A: The map and lot number of your property is printed on your property tax bill.

Q: My child is over 18 and lives with us while attending college, do I include his/her income?
A: Yes, income for all adult members of the household must be reported.

Q: Is social security income included in total adjusted gross income?
A: For some taxpayers it will be, and for some it will not, depending on whether social security income is included in the federal calculation of your adjusted gross income. Your tax preparer or the IRS can help you calculate your adjusted gross income. You may contact the IRS at 1-800-829-1040.

Q: Do I still have to pay my property tax bill even if I haven’t received my relief check?
A: Yes, you must pay your property tax bill by the due date, regardless of the status of your relief check.

Q: Is this a reimbursement of my taxes?
A: No, this is not a reimbursement or rebate of taxes. This relief is not taxable.

Q: Will my town have access to the information on my form and will they be notified of my relief amount?
A: No. Due to confidentiality restrictions, we cannot share this information with your town or others.

Q: I sent in my claim and then received a blank DP-8 Form in the mail, did you reject my claim?
A: No, if your claim was rejected, you would have received a letter from us explaining why.

Q: Why is my relief amount less this year than last year?
A: The calculation of your relief amount is based on many different factors that change from year to year, such as income, property value tax rate, and other criteria that may increase or decrease the relief amount from year to year.

Q: Why didn’t my relief amount increase like my property value did?
A: The law restricts the amount of property value you may receive relief on to a maximum of $100,000 using the most current equalization ratio. The results are shown on Table 3 of form DP-8.

Q: I received one of your letters requesting a copy of my deed: What is a deed and why are you asking for it?
A: The deed is the official ownership of your property that should have been filed with your County Registry of Deeds when you purchased your home. It is used to verify the ownership of your property exactly as it was recorded when you purchased it or last recorded an ownership change.

Q: Can my claim ever be audited?
A: The department is authorized to audit any claim for relief up to 3 years from the date relief was originally granted, to determine whether the claim has been granted erroneously. Any claimant who is assessed as a result of an audit has the same appeal right as previously discussed.

What is a 1031 Exchange?

A 1031 Exchange is a method by which a property owner exchanges one or more relinquished properties for one or more replacement properties of “like-kind“, while deferring the payment of federal income taxes and possibly some state taxes on the transaction. This tax deferred strategy accomplishes 100% deferral of capital gains indefinitely.

There are several variations of a 1031 exchange, but the most common and practical application is what is known as a 1031 Starker exchange. The 1031 exchange allows for a property owner to exchange their property for another property and defer capital gains taxes on the transaction. By allowing for the deferral of capital gains taxes, you are able to preserve the value of your real estate which enables you to secure more lucrative properties. This process of trading up and preservation are part of the wealth building cycle for real estate investors and wealth builders

Benefits of using a 1031

Issues and Challenges with a 1031 Exchange

How Does a 1031 Exchange Works
The 1031 exchange consists of two (2) phases:
1) Sell Current Asset
2) Find Replacement Property

The steps required for each phase are described as follows:
Phase I - Sell Current Asset

Phase 2 - Find Replacement Property
Find a new property (45 days)
QI Transfers funds to escrow
Buy new property (Total 180 days to close)

Importance of the Qualified Intermediary (QI)
In order to meet the requirements of IRS code section 1031 it is required that an independent, unrelated, third party take possession of your funds. This is required in order to prevent what is known as constructive receipt of the funds. If you were to take possession of the monies at anytime in any form, your deferral of capital gains would be disallowed and taxes would be due in the year of disposition of the property. The Qualified Intermediary (QI) selected must be a trusted and responsible party or entity. The QI will be holding your monies for up to 180 days and they must be relied upon to return those monies when you instruct them.

Who Do You Use as Your QI?
Find a third party that has helped thousands of clients with their estate plans and real estate transactions, an entity who specializes in taxes, capital gains deferral strategies, 401(k) programs, etc. These will make them well qualified to assist you in understanding and navigating the issues associated with your 1031 exchange. They should be a registered and licensed Trust Co. and IRA custodian. As such they are a licensed and bonded entity. The holding of your monies in Trust insures that your monies will be handled and managed by a Trusted and regulated entity. This provides you with the peace of mind you need while completing your 1031 exchange transaction.

If you have further questions please do not hesitate to contact Alpine Lakes Real Estate for assistance.

A tax deferred 1031 exchange has been part of our tax code since 1921, yet it remains a mystery to most home owners. A deferred exchange is a simple method by which a property owner may trade one property for another without paying income taxes on the transaction. Not only real estate may be traded but also personal property such as race horses, boats or fine art, etc. The key element in a 1031 is the property must be exchanged for another property prior to the sale. If you sell your house and proceed to buy a new one you can not do a 1031 exchange, you must plan a head. There are four (4) parties involved in a typical exchange:

1. The taxpayer has property and would like to exchange it for new property.
2. The seller owns the property that the taxpayer wants to acquire in the exchange.
3. The buyer has the necessary money and wants to acquire the taxpayer’s property.
4. The qualified intermediary (usually a lawyer) technically buys the property and resells it to the taxpayer for a fixed fee.

The typical exchange is not a swap where by two individuals swap properties with one another. There will be tax consequences for everyone involved in the exchange. However, only the taxpayer will receive the benefits of IRC 1031. The exchange allows the taxpayer to dispose of property and not incurs any immediate tax liability. Their tax dollars can keep working for them in another investment. More over, the loan is forgiven upon the death of the taxpayer, which means their estate never has to repay the loan.

The newest form of qualified exchanges is Revenue Procedure 2002-22. This allows clients wishing to identify a passive investment, as an alternative to the active labor intensive management, repair and maintenance of income producing property.

If you wish to sell an investment property, pay no current capital gains tax and don’t want to manage the new replacement property this procedure is worth considering.

You are matched up with 20 to 50 other investors, who pool their exchange money allowing them to buy a first class office buildings, high rises, shopping malls or Hotels. This qualifies as an exchange because you will have a tenant in common interest in the asset and more importantly the deal is structured with property management in place.

Some of the reasons to consider this type of exchange:

*Can’t find suitable investment and the 45 days are almost over

*Need additional property to complete the gross dollar expenditure

*Back up plan if other property fails to meet inspection, or other conditions

*Retiring and want to simplify the stresses of tenant management

*Selling a multifamily and want a single family, and no tenants for the balance required

* From a real estate stand point property owner wouldn’t list his investment real estate until he has explored a suitable replacement property

Oil and gas tenants in common are another possible solution as these are considered mineral rights and therefore real estate.

There is so much more to get into on this subject, please feel free to call and get a general idea of how this type of IRS 1031 exchange works.

Owners of property in the White Mountains Region of New Hampshire “especially owners in the Waterville Valley and around Loon Mountain” tend to be investment property owners. As such, these people have the opportunity to save thousands in capital gains taxes when it’s time to sell.

Though many people use real estate as a form of investment, here we’re using the term “investment property” as the Internal Revenue Service defines it in the tax code.

Simply put, an investment property is either:

• A home you own that is not your primary residence
• Undeveloped land
• Multi-family properties, such as apartment buildings
• Commercial properties

These are the properties that qualify for sale under IRS Section 1031, the “like-kind” exchange.

What is a 1031 Exchange?
It’s a limited-time opportunity to sell investment property for the sole purpose of buying a different investment property. Because you’re just “exchanging” one investment property for another, you never realize the monetary gain (or loss) from the investment property sale.

As such, you don’t have to pay capital gains taxes on the transaction, until you take your money out of real estate altogether, or if you don’t identify a new investment property to buy within the IRS’ time limit.

How does it work?
It works a lot like escrow. The proceeds from your investment property sale go to a “Qualified Intermediary” or QI, who holds the funds until you identify another investment property for purchase. Then the QI disburses the funds at the time of closing on the new investment property.

Those are the two most common questions we get about 1031 exchanges, and we’ll answer more of them later. For now, though, we’d like to address some of the common misconceptions we hear about 1031s, and put them to rest for good.

1031 Exchanges: Fiction and Facts

Fiction: I’d like to avoid paying capital gains taxes on a real estate sale, but that leaves me with limited options for purchasing my next property.

Fact: “Like-kind” includes these kinds of exchanges:

• A duplex for a four-plex
• Land for a condo
• A condo for a hotel
• A strip mall for an office building

It’s true that there are some limits (like on purchasing a primary residence), but they’re much fewer than some people think.

Fiction: The property exchange must happen at the same time, and everyone knows how difficult it is to schedule two closings on the same day.

Fact: The most common type of 1031 exchange is a “deferred” exchange (read more about that below), which means that it’s perfectly normal and common NOT to do the exchange on the same day.

Fiction: The two parties involved with the exchange must be willing to trade for each other’s property.

Fact: Yes and no. Trading property is just one way to reap the benefits of a 1031 exchange. The majority of 1031 transactions don’t involve a trade – they simply require a Qualified Intermediary (QI) to hold your funds, like escrow, until you find another property to buy.

Whether you add money to the new purchase or have money left over is up to you. And because buying for more or less than the price of your sale can have different tax ramifications, be sure to talk to your tax professional in advance.

Fiction: I can’t use other investment vehicles to purchase investment property without incurring an income tax penalty.

Fact: A self–directed IRA may be used to purchase investment property. This is a fine option for people more comfortable with using their IRAs than real estate assets in executing their 1031 transactions.

Like real estate, self-directed IRAs also provides tangible assets where you don’t receive the proceeds as part of the sale portion of the transaction. And your IRAs may continue to appreciate while you go through the process, while other assets may not. Ask your financial consultant for more information.

1031 Exchanges: Frequently Asked Questions

Do I have to buy an investment property of equal value?
No, you can buy an investment property for greater or lesser value, too! But there will be tax consequences to not spending at least the amount of the selling price of the “relinquished” or “disposed” property.

Can I buy more than one property with the exchange?
Yes you can. Just keep in mind that there’s a time limit set by the IRS, so make sure you understand as much about the 1031 process before your sale, so when you get into it, you’ll be ready to identify your replacement properties in a timely manner.

Can I take some cash out of the sale when performing a 1031 exchange?
Yes. And knowing the rules that govern the qualified exchange will help you avoid future IRS issues, so be sure to talk to your tax professional or a real estate agency like ours with extensive 1031 experience.

If I sell raw land, can I make an exchange for a property with rental income?
Yes. As long as the IRS defines it as an “investment property,” it doesn’t matter what kind of property it is.

Can I use a 1031 exchange to sell property in New Hampshire, and buy property in another state?
Though laws vary from state to state, most states allow this type of exchange without question. A few impose certain additional restrictions – check with your tax professional for more information.

If we acquire a property using a 1031 exchange, will it create a bigger tax burden for my heirs than they might already have?
No. Without the exchange, a property with a low basis, when sold at fair market value, would have greater tax consequences.

What happens when we sell what we bought using a 1031 exchange?
When you sell stocks, bonds, or mutual funds and immediately use the proceeds to buy different securities, you don’t pay taxes. You only pay when you cash out. And it’s the same with the 1031. The capital gains tax is triggered only if you don’t exchange again. It’s the opportunity to keep exchanging up to nicer or better income property opportunities that makes the 1031 exchange so great.

Can we build with exchange money, or can we buy before we sell using a 1031 qualified exchange?
You can do both! The processes are a bit more complex, and much depends on your particular situation. One thing we can say in this short space is that advance planning is a must – call or email us to talk about your individual situation, and let’s see what we can do to help.

Give me a real-world example where you’ve seen the benefits of a 1031.
An Alpine Lakes client sold a duplex he’d been renting to tenants for years, and used the money to purchase a replacement property in the White Mountains. The new property, part of a ski resort, had a rental program that was managed for him while he was out of state.

He contacted us several years later, as his son was about to start college. The value of the ski home had appreciated, and he’d been collecting additional rental income. We suggested he consider buying apartment buildings near the college campus when we sold the ski house, and he did!

After four years of ownership (and the son’s degree to show for it), the apartment was sold, and replaced with a condo near the beach in Florida - again with an on-site rental program.

With his retirement a few years away, the Florida property would pay for itself until out client retired to enjoy it - debt free.

What kinds of exchanges are there?

The four most commonly used exchanges are:

Deferred Exchange. The taxpayer (person or persons party to the exchange) have 45 days after the initial sale to identify a replacement property(ies), and complete the purchase of the replacement property(ies) within 180 days (with some caveats regarding acquisitions prior to the next tax year’s filing and any required extensions).

Reverse Exchange. The taxpayer acquires the new property before the relinquished property has sold. With some variations, the above 45- and 180-day rules apply.

Personal Property Exchange. In this case, “like-kind” takes on a more literal meaning. You could exchange a piece of timber equipment for another piece of like equipment, or an airplane for an airplane. You get the idea.

Construction Exchange. For this type of exchange, the land and any improvements would be paid for in advance on a new property, up to the total amount of the sale of the relinquished property. Funds must be paid out within the 180-day period allowed in the other type of qualified exchanges.

Does Alpine Lakes help with 1031 exchanges?

Absolutely. We’ve helped clients complete 1031 transactions many, many times, and we can guide you through the whole process. It’s important to plan in advance for it, though, because any mistakes or missed steps in setting up the 1031 exchange can wind up costing you.

Call Alpine Lakes Real Estate at 800-926-5653, or email at alre@alpinelakes.com if you’re thinking about selling income property or land held for investment in New Hampshire. Let us help you take the steps necessary in qualifying the sale as a 1031 exchange, explain the process in easy-to-understand detail, and help make this tax-saving opportunity a reality for you.

We get a lot of questions about 1031 Exchange. It’s the IRS tax law that lets you buy & sell real estate without having to pay capital gains taxes. Alpine Lakes Real Estate has completed this type of transaction many times, therefore we’re very familiar with the requirements.

Generally, if you sell your income property or land held for investment in NH, and you have cash left over from the sale after you buy your new property, the leftover amount will be taxed as income. That doesn’t apply to everyone though, so talk to your tax advisor about your own financial situation.

You will want to get a “qualified intermediary” such as Edmund & Wheeler, Inc. (think of it like an escrow company) to do the 1031 exchange.