Rising gas prices have caused many vacation property owners to reevaluate their “get away” options. They still want a cottage on a lake, but the lake needs to be closer to home. With proper planning, a tax-deferred exchange may help them realize that goal.

How much personal use is allowed?

To qualify for tax-deferred treatment under §1031, both the relinquished and replacement properties must be held for investment purposes or for use in the taxpayer’s trade or business. Property held for personal use does not qualify.

So what about vacation homes? Personal use is usually why they were acquired, but how much personal use is too much? Hopefully the properties will appreciate in value. Is that sufficient to demonstrate the necessary investment intent? Or does the property have to be rented out to be considered an investment?

Appreciation ≠ Investment

The Taxpayers in one case faced this exact dilemma.¹ They had lake property that was used 2 or 3 weekends in the summer, with maintenance visits in the off season. They exchanged for property closer to home and used it even more often. The Court disallowed the exchange, finding that the property was held primarily for personal use, not for investment.

The mere hope or expectation of appreciation was not sufficient to establish investment intent. The Taxpayers never attempted to rent either property, never claimed deductions for maintenance or depreciation and deducted the interest as home mortgage interest. Also, their failure to properly maintain the relinquished property was inconsistent with an investment intent.

The IRS Safe Harbor: Revenue Procedure 2008-16

In 2007 the Treasury Inspector General for Tax Administration issued a report recommending additional oversight of like-kind exchanges, specifically stating that: “…the IRS regulations for like-kind exchanges of second and vacation homes are complex and may be unclear to taxpayers…and little exists with respect to a published position by the IRS on like-kind exchanges involving such properties.”²

In response the IRS issued Revenue Procedure 2008-16, which provides a safe harbor. If the procedures are followed, the IRS will not challenge whether a property qualifies as being held for productive use in a trade or business or for investment. An exchange may fall outside the safe harbor and still qualify, but expect more scrutiny from the IRS.

Qualifying Properties

Both the Relinquished and Replacement Properties must have been owned by the Taxpayer for at least 24 months immediately before and after the exchange. In each of the two 12-month periods immediately before and after the exchange the Properties must be rented at a fair market value for 14 days or more. The Taxpayer’s personal use cannot exceed the greater of 14 days or 10% of the days during each 12-month period that the property was rented at a fair market value.

Personal Use

“Personal Use” is not limited just to use by the Taxpayer. It also includes use by:

• the Taxpayer’s family members;
• any other person with an interest in the unit, or their families;
• anyone using the unit under an arrangement which enables the Taxpayer to use some other dwelling unit (even if no rent is charged); or
• anyone, if the property is rented for less than fair market value rent.

Meeting the Safe Harbor

First, you must meet the ownership requirements mentioned above. You should also limit personal use of the property to the greater of 14 days per year or 10% of the rental period. If you use the property any additional days for repairs and maintenance, be ready to show proof of the actual work done

The property should be rented to an unrelated party for at least 14 days per year. However, there is no need to rent the property for more than 14 days. You may also rent the property to a related party if they use it as their principal residence and pay fair market value rent.

It is also important to treat the property as an investment. Make sure that the property is properly maintained. Deduct expenses for maintenance, utilities, insurance and depreciation. If you have a mortgage on the property make sure that it is structured as an investment loan, not as a loan for a primary residence.

Vacation Homes Outside the United States

What if you own a vacation property located outside the United States? In some cases you can still benefit from a 1031 exchange. Real estate located outside the United States is not like-kind to real estate in the 50 states, even if it is located in an affiliated commonwealth or territory, such as Puerto Rico.³ However, you can exchange “foreign for foreign”, (e.g. Belize for Bermuda) as long as the other requirements are met.

A tax-deferred exchange is one of the few wealth building tools available to virtually any investor. Taxpayers should consider the benefits of a tax-deferred exchange whenever they plan to sell property that is not their principal residence.

from First American Exchange Company –

The Exchange Update

A Newsletter For 1031 Tax-Deferred Exchanges

Buyers who find a home they’d like to buy soon after they start their home search often pass on it because they feel they haven’t seen enough listings. Months later, when they haven’t found anything to compare to the first home they really liked, they can regret that they didn’t seize a great opportunity when they had a chance.

It takes a leap of faith and complete trust in your real estate agent to make a quick move in a market that’s new to you. You’ll feel more confident when you’ve done your homework and know the reasons why some listings sell for more than others. This is a process that takes time and is time well spent.

A characteristic of the current home-sale market, particularly in or near areas where job growth has improved significantly, is that there are not a lot of good homes for sale. In these niche markets, there tend to be more buyers looking than there are homes to satisfy the demand.

The housing market is bifurcated. Unlike the high-demand enclaves inspired by a pickup in employment, there are many more areas where there are far too many unsold homes and with too few buyers. This tends to have a dampening effect on home prices.

How long it takes you to find a home will depend in part on whether what you’re looking for is readily available. It will also depend on how many buyers are looking for the same kind of home you’d like to buy. If there’s competition for a scarce commodity, you might make offers on several homes before you are able to convince a seller to accept your offer.

HOUSE HUNTING TIP: Investors snap up foreclosure listings quickly, but they aren’t going to call these places home. It’s rare for buyers to find a home they want to occupy as their primary residence quickly, either due to specialized housing needs or lack of inventory. Put the time you spend waiting to good use by learning more about the community in which you want to live. Patience should be your motto.

Patience is also needed to carry you through the contract negotiation and closing. Although each home-sale transaction is unique, it’s not uncommon for a glitch to come up at some point. Some homes don’t appraise for the price you’ve agreed to pay. If you don’t have any additional cash to add to the deal, and the seller won’t renegotiate the price, you’ll be back at square one, looking for a home to buy.

The glitch could occur before your offer is accepted if the sellers are stubbornly unrealistic about the price they’re asking. Recently, buyers were encouraged to make an offer on an overpriced listing that had been on the market for months. The buyers reluctantly made an offer for the top price they could pay for the house. The sellers flatly turned the buyers down and said they would never sell for that price.

Three months and one price reduction later, the house still hadn’t sold. The buyers were again encouraged to make an offer. They made an offer for the same price they did the first time, but the terms were more agreeable to the sellers. It was accepted.

Many unrealistic sellers never come around. Don’t waste your time on sellers who don’t have a strong motivation for selling. There’s a big difference between sellers who want to sell only if they can get an unrealistic price, and sellers who have purchased another home and have no need for the current one.

THE CLOSING: Until you have an accepted offer, keep your eye on the market; don’t miss a listing that will work for you and is reasonably priced.

By Dian Hymer, Monday, April 2, 2012.

Inman News®

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”

Affluent international buyers, attracted by fire-sale prices, are snapping up real estate in some U.S. markets. In a report released today, Inman News identifies 10 markets where public records indicate foreign buyers make up the biggest share of overall buyers.

Most of the markets are located in sunny Florida, though areas in Nevada, Arizona, New York and Hawaii are also on the list. The report highlights the economic and personal factors that drive foreign buyers to buy; their preferred property types; top countries of origin; how they find the real estate professionals they work with; why the selected markets appeal to them; and relevant demographic and housing-related characteristics for the markets, including share of foreign-born population, distressed property footprint, home-price trends, and vacancy rates.

Among the findings in this report, researched and written by Inman News reporter Andrea V. Brambila:

• Population levels in the markets range from about 600,000 in Lakeland-Winter Haven, Fla., to nearly 5.6 million in Miami-Fort Lauderdale-Pompano Beach, Fla.
• Seven out of 10 markets had foreign-born populations above the national rate of 13.1 percent in 2010. The Miami metro had the highest share born abroad, at 39.2 percent.
• In six of the 10 markets, area inhabitants who were foreign-born and moved from abroad accounted for a higher-than-average share of overall inhabitants who reported moving in the previous year in 2010. New York County (Manhattan) had the highest share: 7.7 percent of the people who moved in that county were both foreign-born and hailing from abroad.
• In seven out of 10 markets, the median sales price for an existing, single-family home was lower than the national median of $163,500 in fourth-quarter 2011. In eight out of 10 markets, the median sales price for a condo was lower than the national median of $160,800 for that same quarter.
• Condo prices fell on an annual basis in the fourth quarter in seven out of 10 markets. All seven saw their prices decline by more than the national rate of -1.7 percent.
• Seven of the 10 markets had a higher share of distressed sales in fourth-quarter 2011 than the national rate of 23.7 percent. Eight of the 10 markets had higher foreclosure activity rates in fourth-quarter 2011 compared to the national rate.
• Nine of the 10 markets, except for Honolulu, had higher vacancy rates in 2010 than the national rate of 13.1 percent. Cape Coral-Fort Myers, Fla., had the highest rate, at 37 percent.

from Inman News Weekly Headlines

In last month’s article, we reviewed financing options for investors to use in their businesses. The two options discussed were traditional financing and asset-based financing (also called a hard-money loan). This month, we will review additional options, including seller financing and lease options, debt partners, and equity partners.

The whole point of both of these articles is to show you that there are financing options that will allow you to capitalize on some of the best real estate deals you will see in your lifetime. Now is the time to be creating a portfolio of real estate that will pave the way for financial independence. Applying these principles will make getting out of the rat race easier than it ever has been.

Seller Financing/Lease Options

Seller financing and lease options are very viable strategies in today’s market as it allows investors an option to bypass financing altogether. Usually when we discuss creative financing techniques, like seller financing or lease options, people usually wonder if these techniques are commonly used and accepted by sellers. The answer to that is yes and no. Let us explain…

Yes, the techniques are commonly accepted. In fact, seller financing is commonly used with commercial properties and other types of real estate that are not easily financed through traditional means (mobile home parks, commercial buildings, etc). Although it is less common with single-family homes, it still happens when it is explained the right way. And that brings us to the “no” part of the answer.

No, they are not common because it is usually explained the wrong way. Most investors will simply ask the seller if they would be willing to carry the financing. Most sellers are not sophisticated enough to know what that means, so they will say “no,” simply because they do not understand. As an investor, part of your success will be based on how you present this to sellers. You would be better off saying something like, “If I were to make your payments on the home until I could find a buyer and cash you out, would that work for you?” or “Would you like cash, or more cash?” Either of these questions will open up the door for the conversation to go further. At that point, you can explain how seller financing or a lease-option works and they can make an educated decision.

When you are presenting seller financing, always frame the discussion around the benefits for the seller. These benefits include monthly cash flow from your payments, more money because of the interest on the loan, no more hassles of being a landlord, and the tax benefits. Tax benefits are a huge reason for people to consider seller financing. If the seller is selling a property where they are making a gain and it is not their personal residence, or if they have lived in the property less than two of the last five years, the seller must pay capital gains taxes. If the seller is receiving a lump sum of money from the sale, they have to pay capital gains taxes. When they are taking monthly payments from you on seller financing, they only pay taxes on the payments received and greatly reduce their capital gains tax. Or, if you are using a lease option, the title of the property has not transferred and it is not subject to capital gains until the property is purchased and title is exchanged.

The whole point of creative financing is to find a win-win scenario. When you construct deals that benefit both parties, you can produce great results by investing and you can also sleep well at night knowing that you have benefitted someone else.

Debt Partner

Most people think that a partner is a partner and there is not much difference between a debt partner and an equity partner. The truth is, that they are very different.

A debt partner is someone that partners with you by owning the debt of the property. In other words, they put up the money, and you are paying them a return in the form of interest on the loan. For the sake of clarity, let’s explain it this way…

When you buy a property through a bank and use traditional financing, the bank is your debt partner. They own the mortgage and expect you to pay them interest on the loan. They make money as the payments are made each month, regardless of how well (or poorly) the property performs. They make money by financing you and you repay them the interest. If the property goes up in value or receives more positive cash flow, they do not receive a greater return.

When you have a partner that puts up the money and they only want you to pay them interest on the money you are using, this is a debt partner. They do not have any ownership in the property. They own the financing behind the property. The property is their security in the event that you do not pay them. If payments are not made, they would have the right to foreclose and secure the property to recoup their investment.

What would make someone want to be a debt partner? It is all based on the return that they would get. Consider the options from their point of view. They could put their money in a CD at the bank and get a return that won’t even keep up with inflation. They could put it in a mutual fund or the stock market and get a lower return. Generally speaking, most mutual funds and index funds offer low rates of return. As a debt partner, they could finance the money on a property, get a fixed return in the 5-9% range, and have the property as security for their investment. That is a pretty safe deal for them when you consider their other options.

Equity Partner

The equity partner is different from the debt partner. Instead of owning the debt on the property, the equity partner owns a percentage of the property based on splits that are predetermined. Since there is not a fixed return (based on an interest rate on the loan) there is no guarantee that the partner will make money.

However, as the property increases in value or cash flow increases, their return increases as well. You will find that most people will prefer to have an ownership interest as it will also provide them a greater return.

When you are raising capital from other people, there are rules that you must comply with or you can get into trouble with the Securities and Exchange Commission (SEC). You will want to read up on Rule 506 for Regulation D on the SEC’s website. It will walk you through exactly what you have to do to be in compliance when raising capital for an investment.

The presentation to potential money partners is one of the most important aspects of raising capital. The presentation should ideally cover market conditions, the type of properties you will be purchasing, why you are able to provide a return, and how the return will be shared. If you do not adequately address all of these issues, then you will not be as successful raising money as you could be.

When you are working with money from your investors, you must be conservative and handle their money the way it should be handled. Provide them with an accounting of each fee, expense, and return. The worst thing you can do with a money partner is to not communicate with them. They will get the impression that you are trying to hide or run away with their money. That does not inspire a lot of confidence.

Raising capital is one way of being able to finance almost any kind of deal. Investors that are successful with equity partners will be able to take their business to the next level without investing any of their own money into the deal.

That is the whole point of these two articles on financing options. There are so many possibilities out there. It is just a matter of finding solutions for your deals. When you open your eyes to the possibilities, you will see that there are so many more options than just traditional financing.

from Rich Dad Education Newsletter

Exclusion of Gain from Sale of Residence

Many people are aware that they can sell their primary residence and not pay taxes on a significant amount of gain. Under Section 121 of the Internal Revenue Code, you will not owe capital gains taxes on up to $250,000 of gain, or $500,000 of gain if you are married and filing jointly, when you sell a home that you used as your primary residence for at least two of the previous five years. Taxpayers can take advantage of this exclusion once every two years.

Property Converted from Investment to Primary Residence

Taxpayers used to be able to trade into a rental, rent the home for a while, move into it and then exclude all or some of the gain under Section 121. Provided they lived in the home as their primary residence for at least two years, they could sell it and exclude the gain under Section 121 up to the maximum level of $250,000/$500,000. In recent years Congress enacted two amendments to Section 121 in order to limit the benefits of Section 121 when the property has been used as a rental.

First, if you acquire property in a 1031 exchange and then convert it to your primary residence, you must own it at least five years before being eligible for the Section 121 exclusion.

Second, the amount of gain that you can exclude will be reduced to the extent that the house was used for something other than a primary residence during the period of ownership. The exclusion is reduced pro rata by comparing the number of years the property is used for non-primary residence purposes to the total number of years the property is owned by the taxpayer.

For example, a married couple uses a tax deferred exchange under Section 1031 to acquire a house as investment property. The couple rents the house for three years, and then moves into it and uses it as their primary residence for the next three years. The couple sells the property at the end of year 6, netting a total gain of $800,000. Instead of being able to exclude $500,000, the couple will not be able to exclude some of the gain based on how many years they rented the house. Since they rented it for three years out of six, 50% of the gain, or $400,000, will not be able to be excluded. Because of this new limitation, the couple will be able to exclude $400,000 of the gain rather than $500,000.

Exceptions

There are a couple of exceptions to this restriction. If the house was used as a rental prior to January 1, 2009, the exclusion is not affected. Using the example provided above, if the three year rental period occurred prior to January 1, 2009, the exclusion would not be reduced and the couple would be able to exclude the full $500,000.

Another important exception is that property that is first used as a primary residence and later converted to investment property is not affected by these restrictions on excluding gain. For example, if you own and live in a house for 18 years and then you move out and rent the house for two years before selling it, you can receive the full amount of the exclusion. Because your investment use occurred after the last day of use as a primary residence, all of the gain accumulated over your 20 year ownership of the property can be excluded, up to $250,000, or $500,000 for married couples.

Combining Exclusion with 1031 Exchange

Fortunately, the rules are favorable to taxpayers who have more than $250,000/$500,000 of gain and are looking to combine Section 1031 with Section 121 to both exclude and defer tax. When the property starts out as a primary residence and then is converted into an investment property, you can exclude gain under Section 121, and then defer tax on the remaining gain, provided you comply with the requirements of both Section 1031 and Section 121.

The Internal Revenue Code still provides investors with favorable options for exclusion of gain and tax deferral. The rules can be complicated, but with the right planning taxpayers can still make the most of their real estate investments. For additional information about the 1031 exchange process or to open an exchange contact us at First American Exchange.

References: Internal Revenue Code §121; Housing Assistance Tax Act of 2008 (H.R. 3221).

from

The Exchange Update

A Newsletter For 1031 Tax-Deferred Exchanges by First American Exchange Company

It’s tax time, so those who don’t own homes are seriously thinking about whether they should. And those who do are busy trying to collect up and cash in all of their deductions.

To boot, the real estate market is in year six (!) of what those who can’t agree on a precise economic term can all agree to call the doldrums.

Those who haven’t lost or walked away from their homes are very focused on how much theirs are worth, how much value they’ve lost, how much they’re paying for them, and whether they can refinance.

Given these financial fixations, one would think that homes were simply a financial instrument, like stock shares or options or something.

But I recently watched a film that poignantly highlighted a number of ways in which the real estate decisions we make are very often driven by values, priorities and motivations that have little or nothing to do with money.

In “The Descendants,” George Clooney is the patriarch of a family that owns a massive land trust in Hawaii. The primary plotline focuses on Clooney’s character’s discovery that his wife was having an affair before the accident that left her comatose (an affair with a real estate agent, no less).

But I also noticed a second, real estate-related storyline. I won’t spoil it, as the film is a must-see portrait of an American family. But the upshot is that Clooney and a boardroom full of his aging cousins are facing some decisions about whether and to whom to sell thousands of acres of pristine Hawaiian beachfront that have been in their family for hundreds of years.

The biggest dollar offer is the underdog from the beginning, and, ultimately, money completely fails to trump history and relationship complexities as the decision-driving factor. (Enough said — go see the film.)

Inspired by “The Descendants,” here are four common motivators and drivers of real estate decisions — and the decision to own a home, in particular — that fall entirely outside of the financial realm:

1. Family. When you own your home, you have the possibility of eventually owning it free and clear — and with that, the possibility of passing it on to your children. Homeownership also gives children stability of place, school and community that can be difficult (though not impossible) to give them while renting.

Last year, I wrote a review of a book that mentioned family legacy as one thing homeowners valued, and almost instantly after my review went live, I received a reader note saying that no one cares about legacy or passing homes down to their children anymore — especially in the wake of the recession.

Then, interestingly enough, I received another half dozen notes from readers about how essential this was to their real estate decisions, and the New York Times published a piece about how the recession was allowing, even prompting, parents to buy homes as gifts for their children. This has all bolstered my belief that, yes, family legacy is still a valid and widely held driver for homeownership and real estate decision-making.

2. and 3. Comfort and control. They say comfort is a core human desire; certainty is also on the list. The ability to control your location, to customize your home’s comforts for your own personal preferences and needs, to control your noise levels and your proximity to (or distance from) neighbors — all these powers to dial up your own comfort levels and have control over your living situation are critical motivators for our real estate decisions.

I see comfort and control as largely overlapping factors that impact many people’s decision whether to rent or to own, but they are not identical. Comfort highlights the fact that, in some areas and school districts, it is tough to find high-quality housing or larger homes for rent.

On the other hand, the control elements of homeownership also include the certainty of knowing what your housing costs will be for a very long period of time, and the power to stay put as long as you want, without being forced to move if and when your landlord wants to sell or move into the place.

4. Career. Our real estate decisions and career choices are tightly intertwined. Many people choose their home in large part based on a desire to make it easier and more comfortable to get to and from work, or even to work at home.

On the flip side, committing to homeownership in this market climate may also limit your ability to move around freely for career opportunities. And having a mortgage certainly puts some boundaries around the decisions you make about how much you work, what work you do, and who you work for.

It’s tough (though not impossible) to quit your day job as an attorney and start your lifelong dream to be a full-time artist when you have a bulky bottom line to meet.

You don’t have to be a land baron or a patriarch to understand that owning a home — or opting out of homeownership, for that matter — is not all about the Benjamins.

By Tara-Nicholle Nelson, Tuesday, February 21, 2012.

Inman News®

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com

It wasn’t long ago that some economic forecasters anticipated a turnaround in the home-sale market by 2012. When the economic recovery stalled and the housing market showed no sign of turning around quickly, projections for a housing recovery were pushed out two, three and even seven years.

Ken Rosen, chairman of the Fisher Center for Real Estate & Urban Economics at the University of California, Berkeley, believes that home prices have bottomed and are increasing in areas powered by strong job growth. However, even in places where prices are rising, they are not rebounding.

Not all economists agree that home prices have hit bottom; many anticipate another 5 percent price decline over the next two years.

Rosen gives a 65 percent probability that the recovery will be choppy. He forecasts a 5 percent chance of a strong recovery and a 30 percent chance of a double-dip recession. Factors holding a recovery back: a general sense of uncertainty that undermines consumer confidence; millions of unsold foreclosure properties; high unemployment; cutbacks in services; and tight credit conditions.

In some urban areas of the country, like Atlanta, Chicago, Miami and Phoenix, it may be more advantageous to buy than to rent. Apartment rents have been rising due to increased demand for rentals from people who have lost their homes in foreclosure, empty nesters trading down, people with jobs who have decided not to buy, and people who would like to buy but who can’t qualify.

The same lenders who gave risky mortgages to buyers who couldn’t afford them in 2005 and 2006 are now making it difficult for qualified buyers to get financing. It used to take a credit score of 620 or more to qualify for a conventional mortgage. In those days, loans to buyers with 5 to 10 percent cash down were readily available.

Today’s buyers need a credit score of 760. Some conventional lenders require a 20 percent cash down payment. If the buyers are self-employed it can be more difficult to qualify. It’s a great time to trade up, but most buyers can’t qualify to buy the new home without first selling their current home.

One of the best things that could happen to the housing market at this point would be an easing of credit-qualifying standards — not to the ridiculously low level of several years ago, but to a level that would enable more creditworthy buyers to take advantage of today’s low interest rates and relatively low home prices.

Good news lately bodes well for the future, but you should anticipate continued volatility. The jobless rate dropped to 8.6 percent nationally in November, the lowest level in 2 1/2 years. The consumer confidence index rose 15 points in November, to 56. Although encouraging, if the economy were on solid ground we would expect a reading of 90.

HOUSE HUNTING TIP: It’s a good time to buy a home in many areas of the country. However, it’s only a good time if you buy for the long term and you have realistic expectations about what buying a home will entail. It will require maintenance, which costs money and takes time.

Your home is unlikely to be the cash cow that most buyers expected — and many achieved — during the bubble years. According to Robert Shiller, Yale University economist, home prices track, on average, with the inflation rate over long periods.

Renters with good incomes and good credit who are tired of moving could benefit from buying a home now. Just be aware that if we go into a double-dip recession, prices could drop another 10 percent in some areas. That’s why you don’t want to buy for the short run.

THE CLOSING: Buyers having trouble amassing 20 percent for a down payment should check with independent banks that have more flexibility in their qualifying criteria.

By Dian Hymer, Monday, January 9, 2012.

Inman News®

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”

Q: We bought a house this year! We put $33,000 down and the bank financed $28,000. Can I write this off on my 2011 taxes? How much of it?

A: First things first: Congratulations! You’ve become a homeowner, and seem to have done so using an enviable financial arrangement. But now that you own a home, you might need to shift the way you think and look at some things, including your taxes and other financial matters.

Owning a home is one of those landmarks that signify financial adulthood. And one of the things that responsible financial adults do is get professional help when the situation requires it. Taxes are one of those areas that often do warrant calling the pros in.

I’m not just shilling for the tax prep industry here, either: The ultimate aim of using a tax professional is to make sure you get every deduction, credit and other tax advantage for which you qualify, without jacking up your chances at triggering the universally dreaded Internal Revenue Service audit by claiming dubious deductions.

Your mortgage debt is fairly small, as was your home’s purchase price, though I don’t know whether they are large or small in the context of your overall financial picture (i.e., income, assets, investments, etc.).

The fact that you saved or somehow came up with such a sizable chunk of change to put down makes me hesitate to assume that your finances are as simple as your mortgage balance might otherwise lead me to believe.

So, it might be the case that you can easily handle your own taxes — in fact, it’s even possible that your real estate-related deductions won’t even outweigh the standard deductions, so that filing a simple form without even itemizing your deductions is actually the financially advantageous move.

Whether that’s the case cannot be determined in a vacuum — you may have other financial and tax issues going on. But with software and tax preparation services as inexpensive as they are, starting at under $20 for simple returns, I think it behooves you to get some professional advice and ensure you get the deductions you need.

Hiring a tax preparer might be a worthwhile investment to make, even if just this year, so he or she can brief you on what records you should keep and strategies you should do moving forward, like home repair and improvement receipts, or documentation of your use of an area of the home as a home office.

Now, let’s talk more substantively about the deductions that are available to you, in the event you do decide to itemize your taxes (IRS Publication 530 offers a more nuanced view into Tax Information for Homeowners):

1. Mortgage interest deduction. Assuming this home is your personal residence, 100 percent of the mortgage interest you owe and pay before Dec. 31, 2011, is deductible on your 2011 taxes. In January, your mortgage lender will send you a form documenting the precise amount of interest you paid, although most lenders also now make this form immediately available to borrowers online.

Chances are good that you paid some amount of advance interest on your home loan at closing — expect to see that on your statement from your lender, but you should also be able to find it on the HUD-1 settlement statement you received from your escrow agent at closing.

2. Property tax deductions. Again, assuming that this is the home you live in most of the time, you should be able to deduct 100 percent of the property taxes you’ve paid to your state and/or local taxing agency this year.

3. Closing-cost deductions. Discount points and origination fees paid to your mortgage lender and/or broker at closing are frequently deductible, but there are rules around this, which tax software and/or professionals can help you make sure you meet. Note that, according to Internal Revenue Service Publication 530, “You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home.”

There are various home improvements (especially those that increase your home’s energy efficiency), state and local tax credits for buying a foreclosure, and other tax advantages that might be available to you.

My advice is to work with an experienced, local tax preparer or, at the very least, use reputable tax preparation software to ensure that you get the maximum tax advantages available to you as a result of your new role as a homeowner.

By Tara-Nicholle Nelson, Thursday, January 5, 2012.

Inman News®

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

Think again if you’re considering buying a home without having it inspected. This particularly applies to first-time buyers who have little, if any, experience with home defects and repairs. Even professionals can make mistakes when buying homes without having them thoroughly inspected.

In one example, an experienced contractor bought a home to fix up and resell. The contractor looked over the property carefully before he bought it, but he did not have it inspected by an impartial home inspector.

After the contractor took possession of the property, he discovered that the furnace was shot and required replacement. The cost of a new furnace was not included in his renovation budget.

Homebuying is an emotional experience no matter how hard you try to keep it strictly business. You have high hopes that nothing will go wrong and the transaction will close. The appeal of a home could cloud your objectivity about the real purchase price when you consider the work that needs to be done to repair defects and deferred maintenance.

Home and magnifying glass image via Shutterstock.com.

Think again if you’re considering buying a home without having it inspected. This particularly applies to first-time buyers who have little, if any, experience with home defects and repairs. Even professionals can make mistakes when buying homes without having them thoroughly inspected.

In one example, an experienced contractor bought a home to fix up and resell. The contractor looked over the property carefully before he bought it, but he did not have it inspected by an impartial home inspector.

After the contractor took possession of the property, he discovered that the furnace was shot and required replacement. The cost of a new furnace was not included in his renovation budget.

Homebuying is an emotional experience no matter how hard you try to keep it strictly business. You have high hopes that nothing will go wrong and the transaction will close. The appeal of a home could cloud your objectivity about the real purchase price when you consider the work that needs to be done to repair defects and deferred maintenance.

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In some areas, the home-sale market has picked up. One example is California’s Silicon Valley, where job growth is strong. There is far more demand than there are homes for sale, which tends to drive prices up.

In some cases, buyers will waive contingencies in order to outbid the competition. Buying without including an inspection contingency in the purchase contract can be an expensive strategy if you later find defects that are expensive to repair.

The risk is minimized if the sellers provide the buyers with copies of recent presale home inspections done by reputable local home inspectors before they write an offer. However, most home inspection reports recommend further inspections. Diligent sellers take the extra step and have further inspections done, like a roof or furnace inspection. Many do not.

HOUSE HUNTING TIP: A second opinion from a highly regarded home inspector can’t hurt. The reason to have inspections at all is to find out as much as possible about the property’s condition before you go through with the sale. Don’t skip an inspection to save money.

Sometimes, buyers who are satisfied with the report they received from the seller’s home inspector will hire that inspector to do a walk-through inspection based on the seller’s report. This means a second home inspector isn’t involved. But at least the buyers have an opportunity to spend time at the property with the seller’s inspector, ask questions, and find out more about what works and what doesn’t.

Inspection contingencies protect the buyers and, depending on how the clause is written, can allow the buyers to withdraw from the contract without losing their deposit. This is why sellers are often drawn to an offer that doesn’t have an inspection contingency. However, accepting such an offer can create problems.

Inspection contingencies also protect sellers from future legal entanglements with the buyers over items that weren’t discovered before closing. It’s much easier to resolve inspection defect issues before, than after, closing.

Inspection contingencies can create an opportunity for buyers to ask sellers to fix defects, lower the price, or credit money at closing to cover the cost of repair work.

When buyers ask sellers to make concessions after they bought the house “as is” with respect to certain disclosed defects, it can be a deal-breaker. However, reasonable sellers will often attempt to negotiate an acceptable solution regarding newly discovered defects rather than put the house back on the market.

If you’re buying in a competitive market and find you’re losing out because you won’t waive an inspection contingency and others are willing to take the risk, consider having inspections done before making an offer.

THE CLOSING: Make sure to ask permission from the seller through the listing agent.

By Dian Hymer, Monday, January 2, 2012.

Inman News®

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”