Do you own and reside in your home?

• If you are over 65 years of age, or certified totally and permanently disabled or blind, you may qualify for the Homestead Exemption. Up to the first $50,000 of your home's appraised value could be totally exempt from taxes. Check out the Homestead FAQs or call (843) 958-4220 for further information.
• Want to save one third of your total tax bill? Be sure to contact the Assessor's office at (843) 958-4100 to apply for the four percent Primary Residence assessment ratio if your property is not already classified as QR-Qualified Residential. Also, apply for the four percent agricultural farmland use assessment at the Assessor's Office. The difference between your property being taxed at the non-residential rate of six percent and the four percent assessment amounts to one third of your total taxes!
• Homeowners who have qualified for the four percent Primary Residence assessment are automatically eligible for state Property Tax Relief of up to $336. No application is necessary.
• If you are a military veteran who is totally disabled from a service-related cause, the surviving spouse of a military person who was killed in the line of duty or totally disabled from a service-related cause, you may be qualified for exemption from property taxes on a house and up to one acre of land on which the house is located. Application should be made through the S.C. Department of Revenue (DOR). There is a local DOR Service Center at 3 Southpark Center, Suite 202, next to Citadel Mall (Phone: 843-852-3600).
• If you are a paraplegic or hemiplegic, or their surviving spouse, you may be qualified for exemption from property taxes on a house and up to one acre of land on which the house is located. Application should be made through the S.C. Department of Revenue. There is a local DOR Service Center at 3 Southpark Center, Suite 202, next to Citadel Mall (Phone: 843-852-3600).

Do you own a motor vehicle?

• If you are over 64 years of age, the cost of your motor vehicle license decal fee can be reduced. Apply in person at a S.C. Department of Motor Vehicles (DMV) or mail a copy of your paid tax receipt and your decal fee to: Division of Motor Vehicles, P.O. Box 1498, Columbia, S.C. 29216.
• Do you drive, on average, over 15,000 miles annually? If so, you may qualify for the high-mileage discount. During the renewal month of your vehicle tax bill, but before you make your tax payment, file the Motor Vehicle High-Mileage Discount Appeal form at the Auditor's office. You can either fax, mail or drop the completed form by any of our offices.
• If you sell your motor vehicle you can transfer your license tag to your new car and not be billed for the new vehicle until your next renewal. If you decide that you would rather turn-in your license tag at the Auditor's office to receive a tax refund for any remaining unused months, bring the bill of sale for the sold vehicle and the license tag and registration to any of our offices.
• If you move to another state you can also receive a refund of your taxes for the unused months. Mail or bring your S.C. (Charleston County) license tag, your S.C. registration card and proof of registration in the new state to any of the Auditor's offices.
• If you were a POW, a Medal of Honor recipient or a veteran who has received a service-connected total disability, you may qualify for an exemption from property tax on up to two motor vehicles. Application should be made through the S.C. Department of Revenue. There is a DOR Service Center at 3 Southpark Center, Suite 202, next to Citadel Mall (Phone: 843-852-3600).
• If you are required to use a wheelchair you may qualify for an exemption from property tax on up to two motor vehicles. Application should be made through the S.C. Department of Revenue. There is a DOR Service Center at 3 Southpark Center, Suite 202, next to Citadel Mall (Phone: 843-852-3600).
• If you are the legal guardian of a minor child who is blind or who is required to use a wheelchair you may qualify for an exemption on one personal motor vehicle if it is used to transport the minor. Application should be made through the S.C. Department of Revenue. There is a DOR Service Center at 3 Southpark Center, Suite 202, next to Citadel Mall (Phone: 843-852-3600).

One key to a balanced portfolio is to make sure the asset classes you hold are non-correlating. To make sure their portfolios have non-correlating assets, and to maximize their returns, investors now want greater control over investment assets held in their retirement plans.

One often overlooked area is real estate. Many investors hold real estate investment trusts (REITs) as an asset class and have done quite well with them, over the years. Most institutional investors, such as banks, pension funds and insurance companies, tend to hold their real estate properties in direct real estate rather than REITs as they are not tied to the stock market.

Because these large institutional investors consider it wise to hold some of their real estate holdings directly, shouldn’t we consider holding some of our real estate holdings the same way?

In a special 2003 real estate issue of Journal of Portfolio Management, Barry Feldman, PhD, states, “We find that the correlations and returns of direct real estate and REITs are similar and that the two investments are complementary in a portfolio.”

The investor’s 401(k), or any other retirement plan, should accurately reflect his or her choices in investment interests, risk tolerance, time horizon consideration, IRS regulations and other important criteria.

You have every right to be informed of the various investment choices available to you and to know the control you can exercise in your retirement plan investment options. Not only can you invest directly in real estate with your retirement plan, but you can also invest in any of the following ways:

• Rental properties, raw land, your future retirement home;
• Commercial, multi-family and vacation real estate;
• Foreclosures and other investment property;
• Business startups;
• Franchise opportunities;
• Tax liens, subleasing and options;
• Business loans, notes and privately held mortgages;
• Limited partnerships;
• Charitable investing.

Special note: The IRS regulations for this type of investing can be complex. You will need someone who is experienced in this type of investing to help facilitate the tax laws and loopholes that will come into play. A simple, even unintentional, mistake could cause all or some of your retirement plan to be considered a full or partial distribution and thus become fully taxable.

Do not be surprised if your advisor has limited knowledge in this area. His or her firm may not allow you to directly invest in real estate with your retirement account. The good news is that there are many qualified firms, facilitators and resources to assist you.

For individuals who are currently in their retirement years and whose monthly income is of great concern to them, these types of investment options should be considered as a way to diversify their monthly income stream. This also can help structure their retirement account portfolios for maximum income efficiency.

Many potential real estate investors, and even current investment property owners don’t fully understand why depreciation is the best real estate tax deduction of all. Uncle Sam requires property investors to depreciate their investment properties such as rental houses, apartments, warehouses, office buildings and shopping centers. Depreciation is a “paper loss” required for estimated wear, tear and obsolescence. However, land value is not depreciable. Residential income property is depreciated over 27.5 years on a straight-line basis. Commercial property is depreciated over 39 years. Personal property used in operating the property, such as apartment appliances, is depreciated over shorter periods, typically five to 10 years. Even automobiles and trucks used in the investment operations can be depreciated over their useful lives. There is also the new first-year 100 percent deduction for up to $100,000 of business equipment purchased to consider. Because depreciation is a non-cash expense deduction, it reduces taxable income from the investment property. But it doesn’t require any cash outlay, as do property taxes, mortgage interest, utilities, insurance and repairs. Although the depreciation expense deduction often turns a positive cash flow property into a tax loss for income tax purposes, the result is the investor’s cash flow from the rental income is said to be “tax sheltered.” Because most investment properties appreciate in market value each year, on paper their “book value” is depreciating or declining annually. The bookkeeping result is the book value declines while the market value usually goes up.

Passive Activity Loss Deductions?

Real estate investments for tax purposes are said to be a “passive activity.” Unless you are a qualified real estate professional entitled to the unlimited realty investment tax loss such as real estate sales commissions, part-time real estate investors who earn less than $100,000 annually can only claim up to $25,000 annual passive activity deductions from their other ordinary income. To quality, part-time investors must pass two tests. First, you must own at least 10 percent of the investment property. The purpose of this tax rule is to eliminate small real estate limited partners from claiming loss deductions against their other ordinary income. Secondly, you must “materially participate” in property management decisions, as explained earlier. To illustrate, if you own a vacation condo that is in a “rental pool” when you aren’t using it, then that is not considered material participation because you don’t approve each individual who uses your condo.

Save Unused Passive Activity Deductions for Future Use

If you don’t qualify to deduct all your investment property passive activity tax losses against ordinary incomes, those undeducted losses can be saved or suspended for use in future tax years or when the property is sold. However, unused tax losses from investment properties cannot be carried back to prior tax years to claim a tax refund. IRS Notice 88-94 allows use of suspended passive activity tax losses from realty investment assets to offset profits from the sale of the property. The tax result is use of suspended property losses on an aggregate basis, rather than property-by-property.

Beware of Recaptured Depreciation When Selling Depreciable Realty

The 1997 Taxpayer Relief Act reduced the federal capital gains tax rate to 20 percent. Then the maximum capital gains tax rate was further reduced to 15 percent in 2003 for assets owned over 12 months. But the special 25 percent depreciation “recaptured” tax rate remains unchanged. “Recapture” means taxed when a property is sold. For example, suppose you bought a small investment property for $300,000 and deducted $100,000 of depreciation during your ownership years. That means your book value (also called “adjusted cost basis”) declined to $200,000. Then you sold for $450,000. Your capital gain is therefore $250,000 ($450,000 minus $200,000). Of that $250,000 capital gain, the $100,000 depreciation deducted will be “recaptured” and taxed at the 25 percent special federal tax rate. The $150,000 remainder of your capital gain will be taxed at the new 15 percent maximum tax rate. However, a superb way to avoid paying the relatively high 25 percent federal recapture tax rate for depreciation deducted is to make a tax-deferred exchange for another investment property, as allowed by Internal Revenue Code 1031.

Material Participation is Required for Investor Tax Breaks

If you qualify as a real estate professional who spends at least 750 hours per year, or more than 50 percent of your working time in qualified real estate work, and if you “materially participate” in managing your investment property, there is no limit to the allowable tax deductions from your properties that can be subtracted from your other ordinary income. You can still meet the material participation test and claim the unlimited tax deduction as a real estate professional, even if you hire a professional property manager to operate you property. However, you must make the major decisions such as setting rents, approving major expenses and qualifying new tenants. But day-to-day operating details such as collecting rents, evicting deadbeat tenants and unclogging drains can be delegated to others, such as your resident manager or a professional property manager.

Conclusion

Real estate investment property offers many benefits, especially tax shelter and probable appreciation in market value. Ownership tax breaks are available during ownership and at the time of sale or tax-deferred exchange. Full details are available from your tax advisor.

If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use. Longer breaks, such as a one-year sabbatical, do not. You also must not have excluded gain on another home sold during the two years before the current sale. Special rules apply to members of the armed, uniformed and foreign services and their families in calculating the 5-year period.

If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

If you do not meet the ownership and use tests, you may be allowed to use a reduced maximum exclusion amount if you sold your home due to health, a change in place of employment or unforeseen circumstances. Unforeseen circumstances can include divorce or a natural disaster resulting in a casualty to your home, for example.

If you can exclude all the gain from the sale of your home, you do not report any of that gain on your federal tax return. If you cannot exclude all the gain from the sale of your home, or you choose not to, use Form 1040's Schedule D, Capital Gains or Losses, to report the total gain and claim the exclusion you qualify for.

For more details and information, get a copy of IRS Publication 523, Selling Your Home, by calling toll free 1-800-TAX-FORM (1-800-829-3676) or by downloading it from this Web site. For rules applying to members of the military, see Publication 3, Armed Forces Tax Guide.

IRS Tax Tip 2004-56, March 22, 2004, Information Courtesy IRS.gov

Some savvy investors have always understood the importance of the profitable real estate market. Many of them have discovered a powerful tax strategy, the Internal Revenue Code Section 1031 tax-deferred exchange.

Using a 1031 tax-deferred exchange, a property owner can trade income or investment property without paying any federal income taxes on the transaction, keeping substantially more of the profit from the sale. With the capital gains taxes deferred, he or she is able to reinvest all of the proceeds, including the amount that would have been paid out in capital gains taxes. This allows the earning power of the tax-deferred dollars to work for the property owner.

In essence, a 1031 tax-deferred exchange can be considered to be an interest-free loan from the Internal Revenue Service. The tax on an exchange does not have to be paid until an investor actually sells the property for cash, and no interest is charged on the taxes that are deferred. Investors can continue to exchange properties as often, and for as long as they wish, thus moving up to better investments and putting off the taxes for many years. The extra purchasing power generated by deferring the taxes will produce increased income and larger investment holdings. Finally, if the investment property is left in the taxpayer's estate, at death the capital gains taxes are wiped away forever.

Under Internal Revenue Code Section 1031, there is no gain or loss recognized on the exchange of property held for productive use, either in a trade or business or for investment, if the property is exchanged solely for similar property. A 1031 tax-deferred exchange allows the taxpayer to trade existing real estate and maximizes the proceeds from a sale that can be applied toward replacement property. However, to qualify under Section 1031, replacement property must be identified within 45 days from closing on the sale of the relinquished property, with closing within 180 days.

The most common exchange format, the delayed exchange, requires investors to work with an IRS approved middleman called a "qualified intermediary", who documents the exchange by preparing the necessary paperwork - the exchange agreements - holding proceeds on behalf of the exchanger and structuring the sale of the relinquished property and purchase of the replacement property.

In a 1031 tax exchange, no portion of the sale price can be classified as monetary.

Just as with any business transaction, conducting a 1031 exchange requires planning. Due to the tight time frame, stringent requirements and options available in a 1031 exchange, sellers should consider all facets of the transaction before selling their property.

Selling Your Home - Tax Exclusion Tips: If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more...
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Why Depreciation is the Best Tax Deduction: If you qualify as a real estate professional who spends at least 750 hours per year, or more than 50 percent of your working time in qualified real estate work, and if you "materially participate" in managing your investment property, there is no limit to the allowable tax deductions from your...
Read Depreciation Best Tax Deduction

401k Investing in Real Estate: Every good investment advisor would agree that any retirement plan should have a properly balanced asset allocation, whether it is a 401(k), Individual IRA, Simple IRA, SEP IRA, Roth IRA or a Coverdell Education Savings Account (ESA). One key to having a balanced portfolio is to make sure the asset classes...
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