Time is running out to boost to your 2011 federal tax refund. All you have to do is make your January 2012 mortgage payment while it’s still December.

It’s a simple tax strategy that works because of how mortgage interest is paid, and of how the U.S. tax code is written.

Different from rent which is paid for the month ahead (i.e. “you’re paying January’s rent”), mortgage payments are made only after mortgage interest has accrued (i.e. “you’re paying for money you’ve already borrowed from the bank”).

This is called “paying interest in arrears” and U.S. tax code states that the mortgage interest is tax-deductible in its year paid, subject to limitations.

By making the January 2012 mortgage payment in December 2011, therefore, homeowners who itemize their on their tax returns can apply their January mortgage payment’s interest portion to their 2011’s tax returns.

The alternative is to pay the mortgage on schedule, and wait for April 15, 2013 to claim the credit.

If you choose to pre-pay your mortgage and typically send your payment via USPS, give your check ample time to be delivered to your lender, and processed. Mail your check no later than Saturday, December 24.

For Broomfield homeowners that pay electronically, the process is simpler. Edit your online bill pay program to have your mortgage payment post no later than Thursday, December 29.

Make note, however. Not all mortgage interest is eligible for tax-deductibility, and not all homeowners throughout the state of Colorado who pay mortgage interest should itemize said interest on their tax returns.

Before prepaying on your mortgage, ask your tax professional for advice.

It’s not scary if you let them work FOR you.  What exactly is a 1031 exchange?  In Boulder Colorado and other parts of Colorado, it is a lawful transaction in which an asset is sold and the proceeds of the real estate sale are reinvested in a similar asset.  Because the transaction exists between two like assets, then no gain or loss is recognized, allowing the deferment of capital gains taxes that would otherwise have been due on the first sale.   There are several important factors to consider when partaking in 1031 like-kind exchanges.  This is a brief overview that a seller/exchanger needs to know in order to pursue this further.  Don’t be scared, all you need is a little help to get you going in the right direction.

This one is important: There are mandatory IRS 1031 exchange guidelines to follow.  Section 1031 of the IRS code allows the seller/exchanger to defer the applicable capital gains taxes on the sale of their property by exchanging it for “like-kind” property of equal or greater value.  The exchanger has 45 days from the close of escrow to identify his/her replacement property and has 180 days from the close of escrow to close on the identified property.  The IRS does not allow extensions.

Use a qualified, reputable intermediary whom the proceeds can be directed.  The seller/exchanger may not take constructive receipt of their sales proceeds or taxes will be triggered.  The qualified intermediary (QI) will then be responsible to acquire the identified on behalf of the seller.  Please find a QI who is certified, licensed, and bonded!  In Boulder Colorado, one resource for 1031 exchanges is Mid-Exchange. 

Implications to ponder….What is the seller’s tax liability including federal and state capital gains taxes?….Are there any depreciation recaptures taxes if applicable?….What are the exchanger’s liquid assets outside of this real estate transaction and other real estate holdings?….Does the seller/exchanger have a huge tax liability and plenty of liquid assets?  If so, then a 1031 like-kind exchange can be a very good thing.

Find properties that are suitable replacements.  In this case – similar.  Replacement properties can include real estate other than your primary residence, second home (although there are some exceptions) partnerships and inventory property.  Apartment buildings, duplexes, raw land, commercial, single family rentals are all included. 

Watch out for fraud! 1031 deception is an unwanted trend happening in real estate.  If you’re aware of the possibilities of fraud, then you have a better chance of it not happening to you.  Another important reason to question your qualified intermediary and know where your money is going.  Be certain they are depositing funds only in money-market accounts that invest in government-backed securities.  Like Peter Wunsch, who started 1031vigilante.com and Rocksolid 1031 which is a exchange company that puts investors first by protecting the investor’s money as if it were their own.

It’s really easier than people initially believe.  Take it one step at a time.  With both, your Realtor and your 1031 exchange professional, your transaction can be a smooth yet strategic investment success!

Ever feel like you can’t win for losing?  Beware, the IRS is closing loopholes on Capital Gains for 1031 real estate exchanges.  Here we go again – the IRS is changing the status of what constitutes capital gains on investment property.   As if we don’t already have enough to think about as a real estate investor.  The reason I bring this up is because we are in a super “investor” real estate market right now.  I live and work in Boulder Colorado where we have people moving here from all over the world, not only because of the beautiful scenery, but because it’s still a good place to invest and that appreciation of the homes are still above average.  I recently picked up a buyer that was looking at one of my foreclosure listings and she was thinking about buying it as an investment and then moving into it themselves in the next few years.  

Currently the capital gains IRS laws for real estate say that if you personally live in the investment property for a minimum of 2 years prior to selling the home,  the IRS basically de-classifies it as and investment property and allows you to sell it as your primary residence and exclude up to $250,000 in gain ($500,000 if you are married) and not have to pay capital gains tax on that portion of the gain of your sale. If your gain is more than your exclusion than of course that portion after the exclusion could be deferred and carried to the next residence.  I’m talking ” Investment 101 for Dummies”  here guys…so if you’re not sure what “gain” is,  it’s basically the amount you paid for the property, plus any capital improvements (not cosmetic)  done over the years that you owned it, subtracted from your sale price (less any costs that you had to do to get it ready for the sale).   Currently the tax rate for most taxpayers is 15% on long-term capital gains (property that is held for longer than 12 months) and ranging from 10%- 35% on short term capital gains (property held for less than 12 months).  Right now, individuals in the 10% and 15% tax brackets (that’s the tax level you are at when you figure your total taxable income for your tax return) pay 0% on long-term capital gains.

The new IRS rule which goes into effect starts Jan 1, 2009 states that you cannot take the full tax exclusion ($250,000 or $500,000) on the sale of your home if it was your investment property before it was your primary home.   The IRS wants you to separate the “qualified time” (the period of time that it was used as your personal residence) and the “non qualified” time (the time it was used as a rental).   Basically you will have a reduced “tax free exclusion”.  Non qualified time prior to Jan, 1, 2009 is not taken into account in allocation for non qualified use but is taken into account for ownership (that is a question for your tax adviser) .

Say you bought a house in 2002 and rented it out for 4 years and then moved into it for the last 2 years as your personal residence:  Here is what will happen if you sell it after Jan 1, 2009.

Current                                                       After Jan 1, 2009

Gain on sale:           $250,000                          $250,000

Exclusion:             – $250,000                       – $  50,000

Capital Gain:          $  0                                  $ 200,000

15% tax               $   0                                  $   30,000

Basically the 4 years that you owned it as a rental doesn’t qualify for the exclusion.

When you report your taxes for that year you sold the house, you have to add back into your income the capital gains (and of course the IRS will have a form that calculates all the non vs qualifed time etc…) and at what rate you will be taxed, depending on all of your other taxable income.   If you were taxed at a 15% rate that could mean a difference of $30,000.

Not small pocket change.  Of course, the whole concept of 1031 exchanges allows you to roll capital gain into the next investment property (and not pay tax on it the year you sell it and roll it into another property), which is a great idea, it might just cost you more in the long run when you eventually sell it outright.  By the way, they call this the Housing Assistance Tax Act of 2008…..let me know if you see where the IRS is making an assist!   Maybe by the time you sell down the road the IRS will change the rules again.  Please note that it is imperative that you check with your tax and investor advisers on this as I am not a tax adviser,  just a interested Realtor trying to pass along some good info.

hey converted an investment or rental property into their primary residence they can no longer take the full tax exclusion, on the sale of their primary residence, provided under Section 121.
Prior to this act, taxpayers could under Section 121 defer capital gains tax on the sale of their primary residence regardless of how the property was used before it’s conversion to a primary residence.  Section 121 allows a person to exclude up to $250,000 in gain or $500,000 for a married couple or domestic partners.