Real Estate
Questions and Answers
By Dan Smith

Questions and Answers

 This month I received a couple of letters that I thought I would respond to publicly. One of the readers asked:

Question:     “Why are the closing costs and fees deductible on a rental property and not on a primary residence?”

Answer:     Well that is really a question for your congressman or senator to some degree. I am someone that thinks a flat tax and/or a national sales tax would be much more efficient, fair and simple plan, than the mess we all deal with each April. However to answer your question more directly, there are additional tax benefits to owning rental property. Because the IRS thinks of this as akin to owning a small business, all your expenses are tax deductible generally speaking. You can remodel, paint, and add new carpet and at the end of the year declare your improvements under the “repairs” section of your schedule E. You may also be able to deduct insurance costs, depreciation (which is fictitious in most US housing markets) cleaning, advertising and the like. If the rental is in a resort area, you may even be able to deduct the travel expenses associated with visiting your property. As always you should consult a good CPA, who can walk you through your own specific circumstances and devise a tax strategy to fit your needs.

Question:     “My son and daughter-in-law recently bought a first home with no money down. The lender did a 100% financing using a “Down payment Assistance Program” (DAP). I recently read that the IRS had ruled against that kind of program. Are my children at risk?”

Answer:    The short answer is “No, your children have nothing to fear from the IRS in this regard.” Your children likely used a standard FHA loan program in conjunction with the DAP. The FHA has always held that the down payment for a home purchase can come from a gift, from a family member or a charity. In recent years charities (as defined by the 501-3(C) designation obtained through the IRS popped up, that received donations from pre-disclosed sellers, who in turn made grants for down payments to associated buyers. The charity took a pre-specified slice out of the original donation, before passing it on to the buyer. So everyone seemed happy with this arrangement. The problem was that the IRS viewed this as a simple business transaction, since no donation was made unless a real estate transaction closed. So they withdrew the 501-3(C) designation from all these related charities moving forward, which in essence eradicated all DAP programs in one fell swoop. Buyers who participated already have a closed loan that no one can take away, so long as they keep making payments on time. However, sellers who were counting on an additional charitable tax deduction on their taxes next year will be in for a rude surprise, since their contribution is likely to no longer be considered a charitable one.

For expert advice on this or any other aspect of home finance, call the professional. Dan Smith can be reached at 303-674-0201, or visit him on his web site at www.ColoradoHomeLoans.com anytime!