SECOND HOMES RENTED LESS THAN 15 DAYS PER YEAR

• Qualifying Residences -- Can by a house, condo, co-op, mobile home, house trailer, boat, houseboat, or similar property. (Must have sleeping, cooking and toilet facilities.)
  
  
• Rental Income -- Income not reportable.
  
  
• Deductible Expenses -- Interest (with limitations), property taxes, and casualty losses.
  
  
• If Sold at a Gain -- Reportable as a capital gain (portfolio income). No deferral or exclusion allowed as with a principal residence.
  
  
• If Sold at a Loss -- No loss allowed.

CONSULT A PROFESSIONAL

   When considering the purchase of real estate or any other similar investment, please don't forget to consult the appropriate professional (i.e. accountant, attorney, realtor and banker) before signing a contract or completing the deal.

   Fees paid for good and timely advice will save you money and headaches in the long run.

SECOND/VACATION HOME RENTED 15 DAYS OR MORE PER YEAR

• Second/Vacation Home Rules Apply -- If the vacation home is rented 15 days or more per year and personal use exceeds the greater of 14 days per year or 10% of the days rented the vacation home rules will apply.
  
  
• Rental Income -- All rents are reportable.
  
  
• Deductible Expenses -- Interest (with limitations), property taxes, and casualty losses. There are other expenses that are deductible only to the extent that income exceeds interest and taxes. In order, they are: insurance, repairs, utilities and depreciation.
  
  
• If Sold at a Gain -- Must be treated as if two properties. Gain attributable to the personal use portion is reportable as a capital gain (portfolio income). No deferral or exclusion allowed as with a principal residence.
  Gain attributable to the rental portion is part ordinary and part capital gain.
  
  
• Is Sold at a Loss -- No loss allowed on personal use portion. Loss on rental portion is an ordinary loss. Timeshare losses are not allowed.

RENTAL HOME/CONDO WITH NO PERSONAL USAGE

• Rental Income -- All rents are reportable
  
  
• Deductible Expenses -- All ordinary and necessary expenses. Losses are deductible to the extent allowed by passive loss limitations.
  Unallowed losses are carried forward to future years.
  
  
• If Sold at a Gain -- Reportable partly as ordinary income and partly as a capital gain. No deferral or exclusion is allowed as with a principal residence.
  
  
• If Sold at a Loss -- All losses are deductible as ordinary losses including unallowed passive losses from prior years.

SETTLEMENT COSTS

   The additional costs associated with the purchase of real estate can be substantial. These costs include fees for attorneys, title insurance, state stamp taxes, transfer taxes, loan processing, loan origination fees (point), etc. Few of these are currently deductible. Consult your tax preparer for specific treatment of each item.

CAN I DEDUCT LOSSES FROM MY RENTAL PROPERTY?

   The deduction of losses from the operation of a rental property are limited each year based on your level of income and amount of participation in the rental activity.

PASSIVE ACTIVITY LOSS RULES

   For purposes of the passive activity loss rules, rental real estate properties generally are treated as passive investments regardless of the owner's level of involvement. In general, if rental realty produces a tax loss (deductions exceed income) its owner usually cannot use the loss to offset non-passive income (such as interest, dividends, or salary).

$25,000 ALLOWANCE

   One exception to the passive activity loss rules allows taxpayers to use up to $25,000 of losses from "active participation" rental real estate activities to offset non-passive income. This annual loss allowance phases out for those with adjusted gross income above $100,000, and is completely phased out when adjusted gross income reaches $150,000.

RENTAL REAL ESTATE PROFESSIONALS

   Qualifying real estate professionals are subject to more liberal passive activity loss rules. If you're one of them, your rental real estate properties generally are treated like any other non-rental-activity business. As a result, if you materially participate in the properties, you can use losses to offset non-passive income. In general, material participation means substantial and ongoing involvement under one of a number of test carried in IRS regulations.

WHAT IS A LIKE-KIND EXCHANGE?
   A like-kind exchange enables you to dispose of appreciated property without being taxed on the gain by exchanging it rather than selling it. No gain or loss is recognized if property held for productive use in trade or business, or for investment is exchanged solely for property of a like-kind to be held either for productive use in trade or business, or for investment.

   Like-kind property means property of the same nature or character, not necessarily of the same grade or quality, For example, improved real estate could be exchanged for unimproved real estate. Exchanges can thus include business for business, business for investment, investment for business, or investment for investment property.

WHAT PROPERTY DOESN'T QUALIFY?
   Some types of property cannot qualify as like-kind exchanges. Excluded from non-recognition treatment are exchanges of:

• Stock in trade or other property held primarily for sale (i.e. inventory)
• Stocks, bonds, and notes
• Other securities or evidences or indebtedness or interest
• Interests in a partnership
• Certificates of trust or beneficial interests
• Choses in action

WHAT IF THE PROPERTIES ARE NOT EQUAL IN VALUE?
   If the trade is a straight assset-for-asset trade, you will not report and gain from the exchange. Frequently, however, the properties are not equal in value so some cash or other property is tossed into the deal. This is known as "boot". If boot is involved you will have to recognize your gain, but only up to the amount of boot you receive in the exchange. The remainder amount still qualifies for tax deferred treatment.

   In these exchanges, the basis you get in the like-kind property you receive is equal to the basis in the property you gave up reduced by the amount of boot you received and increased by the amount of gain recognized. Note that no matter how much boot is received, you will never recognize more than your actual ("realized") gain on the exchange. If the property you are exchanging is subject to debt from which you are being relieved, the amount of debt is treated as boot.

LIKE-KIND EXCHANGE EXAMPLE
   Ted exchanges land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 cash. Ted's gain on the exchange is $35,000: he received $135,000 in value for an asset with a basis of $100,000. However, since it's a like-kind exchange, he only has to recognize $15,000 of his gain: the amount of cash (boot) he received. Ted's basis in his new building will be $100,000: his original basis in the land he gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

CAN I EXCHANGE PROPERTY WITH A RELATIVE?
   These exchanges are referred to as related party transfers and as such have special restrictions. The most common covered relationships that are considered related parties are your siblings, parents, grandparents, spouse, children and grandchildren. Partnerships and corporations in which you hold more than a 50% interest are also related parties for these purposes.

   If a like-kind exchange is made between related parties, nonrecognition treatment will be lost if either property in the exchange is disposed of within two years of the exchange. If you enter into a like-kind exchange with your relative or other related party, you must file a special like-kind exchange form, Form 8824, with Internal Revenue Service, not only for the year of the exchange, but for the two years following.

CAN I USE A QUALIFIED INTERMEDIARY?
   YES! The IRS has provided a safe harbor whereby you can use a qualified intermediary in a tax-deferred exchange of property for money which allows a taxpayer to defer gain as long as the taxpayer purchases like property within identifying and receiving guidelines.

TIMING OF THE EXCHANGE
   To be eligible for non-recognition treatment, the properties need not be exchanged simultaneously, but the exchange must meet two separate timing requirements. If neither of the requirements are met, the property received in the exchange is not like-kind and the tax deferral of the gain does not apply. The two requirements relate to the timing of the identification and the receipt of the property to be received in the exchange,

   In order to qualify as a like-kind exchange, the property to be received must be:

• Specifically identified on or before the 45th day after the date of the transfer of the property relinquished in the exchange.
  • Property is properly identified only if it is specifically designated as replacement property. The designation must be made in a written document.
• Actually received before the end of the exchange period.
  • The exchange period begins on the date that the relinquished property is transferred and ends on the date that is the earlier of 180 days after the date of the transfer or the due date of the income tax return (plus extensions) for the taxable year in which the relinquished property was transferred.

   The timing requirements must be strictly observed in order for the exchange to qualify for non-recognition of gain or loss. Please consult a tax professional to ensure that you do not lose qualification for a like-kind exchange.