Real Estate Investment
Chapter 8
Single-Family Dwellings
and Condominiums
© 2011 Cengage Learning
Key Terms
Acquisition debt
Adjusted basis of
the home
Advance rentals
Business use of a
home
Capital gain
Capital
improvement
Exclusion
Home equity debt
Long-term lease
Part-time for rental
purposes
Realized selling price
Time-sharing
ownership
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The Principal Residence
That place where the taxpayer actually
lives most of the time and calls “home.”
Condominium
Single-family house
Vacant lot with mobile home or tent
Retirement units
Etc….
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Allowable Tax Deductions
Interest
Property Taxes
Casualty Losses
Limited to lesser of
Decrease in market value
Adjusted basis in the property
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Limits on Interest Deductions
Home acquisition debt
Debt that incurred in acquiring, constructing,
or substantially improving any qualified
residence.
principal residence plus one
For such mortgages originated after
10/13/87, interest is deductible on debt that
does not exceed $1 million.
Debt limited to $500,000 married taxpayer
filing separately or a single person.
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Limits on Interest Deductions
Home Equity Debt
In addition to the acquisition debt, interest is
deductible on loans up to $100,000
$50,000 for each married taxpayer filing
separately
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Limits on Interest Deductions
Additional Qualified Residential Property
Mobile homes, boats, vacation cabins….
Discount as a Deduction
Property Tax Deduction
Taxpayer-owned residences without
limitations
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Tax Treatment on Gain from Sale
$250,000 if single or $500,000 if married
and filing jointly
Requirements:
House must be owned as taxpayer’s main
home for 2 or more years during five-years
prior to sale
If married, only one spouse needs to meet this
requirement.
Taxpayer must not have sold or exchanged
another main home over last 2 years.
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Calculation of Capital Gain on
Sale of Personal Residence
Difference between the adjusted basis of
the home and the realized selling price
Basis of Property Value
Adjusted basis
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Adjustments to Basis
Increases:
Improvements
Additions
Other capital expenses
Special assessments for local
improvements
Amounts spent to restore damaged property
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Adjustments to Basis
Decreases:
Insurance reimbursements for casualty
losses.
Deductible casualty losses not covered by
insurance.
Payments received for easement or right-ofway granted.
Depreciation allowed, but only if the home is
used for business or rental purposes.
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Realized Selling Price
Total Consideration Received
Cash, notes, mortgages, fair market value
of any real or personal property received.
Less Selling Expenses
Sales commission, advertising, legal fees,
loan placement fees or discount points.
Less Fixing-Up Expenses
Decorating and repair costs incurred solely
to assist in the sale.
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Record Keeping
Proof of the home’s purchase price and purchase
expenses.
Receipts and records for all improvements, additions,
and other items that affect the home’s adjusted basis.
Worksheets concerning the adjusted basis of the
home, the gain or loss on the sale, the exclusion, and
the taxable gain.
Form 982 regarding discharge of indebtedness.
Form 2119 filed to postpone gain from the sale of a
previous home.
Worksheets that were used to prepare Form 2119.
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Sample Calculation of Property Basis
Original cost of duplex
$450,000
Addition to duplex
20,000
Total cost of duplex
470,000
Minus: Depreciation
70,000
Adjusted basis before casualty
400,000
Minus: Insurance proceeds $29,700
Deducted casualty loss
6,000
Salvage proceeds
5,300
$41,000
41,000
Adjusted basis after casualty
359,000
Add: Cost of restoring duplex
15,000
Adjusted basis after restoration
$374,000
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Sale of a Principal Residence
Married Couple Filing Jointly
Purchase Price
Purchase Costs
Acquisition Basis
Capital Improvements
Adjusted Basis
Sales Price
Less Adjusted Basis
Gain on the Sale
Less Exclusion
Taxable Gain
Capital Gains Tax Rate*
Tax Due
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$180,000
$10,000
$190,000
$30,000
$220,000
$700,000
$220,000
$480,000
$500,000
-020%
-0-
Sale of a Principal Residence
Married Couple Filing Jointly
Purchase Price
Purchase Costs
Acquisition Basis
Capital Improvements
Adjusted Basis
Sales Price
Less Adjusted Basis
Gain on the Sale
Less Exclusion
Taxable Gain
Capital Gains Tax Rate*
Tax Due
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$180,000
$10,000
$190,000
$30,000
$220,000
$800,000
$220,000
$580,000
$500,000
$80,000
20%
$16,000
RESIDENCE CONVERTED TO RENTAL USE
Necessary to determine the basis from
which the property may be depreciated.
Basis is the lesser of:
1. The fair market value of the property
on the date of conversion.
2. The adjusted basis of the property
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RESIDENCE CONVERTED TO RENTAL USE
The income and expenses of rental
property are subject to IRS rules
Rental Income
Regular Payments
Advance Rent
Payment for Lease Cancellation
Expenses Paid by Tenant
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RESIDENCE CONVERTED TO RENTAL USE
Rental Expenses
Cost Recovery (Depreciation)
Repairs and Maintenance
Handicap Exception
Other Expenses
Rental of a room
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Business Use of the Home
Permissible deductions include depreciation,
maintenance, insurance, and utility expenses
allocated to the portion of the house used for
business
deduction taken for depreciation reduces the basis
of value
Taxpayers may no longer lease a portion of a
home to an employer and claim deductions as
a business usage.
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Business Use of the Home
The limit on deductions is the gross
income from that business minus the
sum of:
1. The business % of the otherwise
deductible taxes and casualty and theft
losses.
2. The business expenses not
attributable to the use of the home, such
as salaries and supplies.
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Part-Time Rental Units
Most commonly used for vacation homes
Dwelling unit may be a house, apartment, condominium,
mobile home, boat, or other similar property
Personal use occurs when a dwelling unit is used by:
1. The taxpayer, a member of the family, or any other
person with an interest in the property, unless a fair
market rental is paid.
2. Anyone under a reciprocal arrangement that
enables the taxpayer to use some other dwelling unit.
3. Anyone at less than a fair rental.
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Part-Time Rental Units
Allocation of Expenses
Category 1—Rented Less Than 15 Days
Category 2—Part Rental, Part Personal Use
Limitations on Allocation of Expenses
Category 3—Personal Use, Less Than 15
Days
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Time-Sharing Ownership
Time-sharing ownership means the
holding of rights to exclusive use of real
estate for a designated length of time
Long-Term Lease
Condominium Time-Sharing
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Condominiums
Typically a fee simple estate in a specific unit,
while owning the community property as a
tenant in common
The Unit Owner
Mortgage Interest
Real Estate Taxes
Maintenance, Repairs, Insurance
Depreciation or Cost Recovery
Capital Improvements
Sale or Exchange of a unit
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