Shhh! 5 Real Estate Tax Secrets the Rich Don't Want You to Know

Do you ever feel like the rich just keep getting richer? Well, allow us to let you in on a little secret: Part of the reason they keep on raking in dough is that they take advantage of real estate tax strategies that many ordinary homeowners have no clue even exist. So what are they, exactly—and can we ordinary mortals take advantage of them, too?

For starters, most of these strategies involve investment properties—in other words, not your primary residence. So if you have a cabin in the woods or a beach house that sits empty most of the year, you might be in luck. Read on to follow in the well-heeled footsteps of the wealthy and maximize your tax savings this year.

Strategy No. 1: Take advantage of ‘safe harbors’

Smart investors don’t let second homes lie vacant, but rent them out, says Crystal Stranger, president of 1st Tax and author of “The Small Business Tax Guide.”

Not only will you make extra cash, you can deduct expenses such as repairs, insurance, real estate taxes and mortgage interest, says broker and attorney Bruce Ailion of RE/MAX Town and Country Commercial in Atlanta, GA.

Even better, the IRS has what’s known as a “safe harbor” rule for rental property expenses that, after Jan. 1, 2016, was expanded from $500 to $2,500. Here’s what that means for you: Let’s say the cost to replace the roof on a rental property is $4,500. Ordinarily, this would be a capital expense you’d have to deduct over the life of the roof (so, $180 per year for 25 years). But if you break the cost of the roof into two smaller bills (let’s just say $2,400 for materials and $2,100 in labor), since they’re both under $2,500, the IRS allows you to deduct these expenses all in their first year, in their entirety—and added together! So that ends up being a massive first-year deduction of $4,500.

One red flag: If you personally use the property for more than 14 days during the year, your tax implications can change, so check with your accountant to make sure you’re in the clear.

Strategy No. 2: Depreciate your rental property

The IRS views a rental property as a business expense and expects it to depreciate over time. Ka-ching! You can deduct a portion of the cost of the home—what are called deprecation losses—for upward of 27.5 years (the amount of time the IRS thinks is the deductible life of a single-family home).

Tom Wheelwright, CPA and author of “Tax-Free Wealth,” gives this example of how depreciation works: Suppose you buy a duplex for $400,000 this year with 20% down ($80,000) and a $320,000 bank loan. Let’s say the duplex produces an annual cash flow—after expenses and mortgage payment—of $24,000. According to the IRS, the depreciation deduction for this property should be about $32,000 for the first five or six years. Since that depreciation ($32,000) amounts to more than your cash flow ($24,000), this actually produces a tax loss of $8,000 a year ($32,000 to $24,000). With proper planning, that tax loss can offset your other income, saving you a bundle.

Strategy No. 3: Depreciation is actually a ‘phantom deduction’

The rich know that these depreciation losses for rental properties—defined by the IRS as an allowance given to property owners for the “exhaustion, wear and tear (including obsolescence) of property”—is, in fact, a “phantom deduction.” Phantom because, as Than Merrill, CEO and founder of FortuneBuilders.com, points out, while the IRS compensates landlords for the depreciation of their assets, homes tend to do the opposite and appreciate in value. And therein lies the true value of depreciation losses: If the value of your property rises, the loss the IRS allows never actually takes place. So you save money on taxes and make a profit at the same time.

Strategy No. 4: The 1031 exchange

When it comes time to sell an investment property, wealthy folks never worry about paying taxes on their profits. Why? Because they take advantage of what’s known as the 1031 exchange. This tax rule allows people to sell an investment property for a profit and move the proceeds directly into another investment property while deferring the tax liability. If done right, you can ratchet up the value of your holdings in real estate without eroding your capital by paying capital gains tax, says Ailion.

Let’s break down how it works: If you sell a property for $500,000, you then have 90 days to find a replacement property of equal or greater value (while a qualified intermediary holds the proceeds) and then 180 days to close on that property. As long as you don’t touch the money in holding before closing, no tax will be due on the original sale.

Strategy No. 5: Leave more money to your heirs

If you use the 1031, your heirs will be left with real estate that has a much lower tax basis than its actual value when you die. This is because the tax law specifies that when someone passes away, the gain inherent in their investments disappears, says Wheelwright.

For example, that property you bought under the 1031 exchange for $500,000 might be worth $1,000,000 when you meet your maker. Your heirs can immediately sell without paying a cent of capital gains tax. While they may pay estate or inheritance taxes, the overall tax savings are massive.

Want to take some cash out of the property while you’re alive and kicking? Simply refinance the property and take out a home equity line of credit (HELOC). The rich also know there is no tax on debt, so a HELOC is an easy way to get cash flowing without having to pay up (at least to Uncle Sam).

Margaret Heidenry is a writer living in Brooklyn, NY. Her work has appeared in The New York Times Magazine, Vanity Fair, and Boston Magazine.

New Home Sales Beat Forecasts, Up 20%:

The Commerce Department said today that new home sales for August came in at a seasonally adjusted annual rate of 609,000 units last month. Sales were up 20.6 percent from a year ago.

Economists had forecast single-family home sales, which account for roughly 10 percent of all home sales, falling to a rate of 600,000 units last month.

July's sales pace was revised up 5,000 units to 659,000 units. That level of annualized sales is the highest since October 2007.

New home sales have also benefited from a dearth of previously owned houses available for sale.

Last month, the inventory of new homes on the market rose 1.7 percent to 235,000 units.

At August's sales pace it would take only 4.6 months to clear the supply of houses on the market, up from 4.2 months in July.

The median price for a new home is now at $284,000

Distressed Sales Drop to Lowest Level Since 2007:

In yet another sign of strength in our housing market, sales of distressed homes (REO real estate owned by banks) has dropped to their lowest level since April 2007.

The most recent readings from CoreLogic show that distressed home sales made up just 11.1% of total home sales in April, down 3 percentage points from April 2014 and down 1.5 percentage points from March.

Broken up, REO sales accounted for 7.4% and short sales made up 3.7% of total home sales in April. Additionally, the short sales percentage fell below 4% in mid-2014 and has remained stable since then.

At its peak in January 2009, distressed sales totaled 32.4% of all sales, with REO sales representing 27.9% of that share.

“The ongoing shift away from REO sales is a driver of improving home prices since bank-owned properties typically sell at a larger discount than short sales. There will always be some level of distress in the housing market, and by comparison, the pre-crisis share of distressed sales was traditionally about 2%,” the CoreLogic report said.

“If the current year-over-year decrease in distressed sales share continues, the distressed sales share would reach that ‘normal’ 2-percent mark in mid-2017,” it continued. 

Economic Momentum is Strengthening Home Buyer Demand:

The housing market has been steadily growing and now has the potential to grow even more as mortgage rates remain low and have just ticked upward off of their one-year lows and credit is starting to loosen.

But what is ultimately driving demand is the strength in the labor market and related improvements in consumer attitudes.

Jobless claims in October remained beneath 300,000: The last month that averaged under 300,000 weekly claims was June 2000 (almost a 40 year low). Continuing claims were last this low at the height of the housing boom.

Consumer confidence and consumer sentiment are both now at seven-year highs.

The first estimate of the third quarter GDP indicated the economy expanded 3.5% as all sectors including government spending contributed to growth. The condition of the U.S. economy is clearly improving.

In every year of this recovery we’ve seen growth fade as we reached the fourth quarter.  But this time it may be different as almost all the fundamentals are much healthier. Jonathan Smoke, Realtor. com's chief economist, expects to see solid employment numbers for October this week and more positive momentum to carry the housing market through the winter.

Is Your Home Ready to Keep you Warm?

The crisp snap of autumn weather is a reminder that even colder days lie ahead. Get ready for them by performing a few simple chores now that will keep you toasty all winter long.

Install weatherstripping
Weatherstripping can save you up to 20 percent on heating bills — especially if you have drafty windows or doors. Plus, it’s quick and easy, and doesn’t cost a lot of money. Place weatherstripping along doorjambs and in the gaps between windows and sashes to keep chilly breezes out and heat in.

Fix drafty doors
If your doors need extra draft protection, add a door sweep along the bottom. These flexible rubber strips seal the gap at the bottom of the door to keep howling winds at bay. If cold air is still getting in, buy or DIY a door snake — a tube of fabric filled with sand, rice, or other material — to lay on the floor and plug the gap.

Add insulation
The attic and basement are two spots where you can lose a lot of heat. By insulating your basement ceiling and attic floor, you can prevent warm air from escaping the house. Also check around the exterior of your house for cracked foundation, gaps or cable holes, and seal them or fill them with spray foam insulation.

Check your furnace
Like any piece of machinery, your furnace works better if it’s properly maintained. Some utility companies offer a free annual checkup for your furnace, but if yours doesn’t, it may be worth paying a technician to ensure that your furnace is in top condition. But you can also improve your furnace’s performance with simple maintenance that you can do yourself, like replacing filters and cleaning registers.

Swap your thermostat
Standard thermostats can lead to wasted energy. If you opt for a smart thermostat like the Nest, you could cut down on your energy use — and your utility bills. Among other features, these smart thermostats can sense when you’re away and automatically adjust the temperature to save you money.

Seal ducts
If you have forced-air heat, leaks in your ducts could be costing you hundreds of dollars. Seal them with specially designed metal tape and keep your ducts — and your wallet — more secure.

Embrace fabrics
While a cool tile floor might feel nice underfoot in summer, it’s not so appealing when it’s sub-zero outside Cover your floors in throw rugs and runners for the winter months. You can also hang heavy insulating drapes in front of your windows to keep warm air in and the cold out where it belongs.

A New Group of First Time Homebuyers is on the Horizon:

The American dream is still alive as Teens overwhelmingly think that they will own their home.

A new survey found that American teens overwhelmingly think that they will be home owners—a far cry from millennials who were much less sanguine about their fortunes in an earlier study.

The study, conducted for real estate service Better Homes and Gardens Real Estate, found that 97 percent of those ages 13-17 believe they will own a home in the future. Compared with the 40 percent of millennials who said in an earlier Better Homes study that they expected to buy a home in the near term, these new figures prove that the younger generation may be more attached to the notion of home ownership.

This means that the next generation to reach adulthood will bring about 21 million hopeful home buyers to the market. For reference, just over 5 million existing homes were sold in 2013, according to the National Association of Realtors.

Lest anyone suggest that the survey's respondents are unaware of what it takes to be a homeowner, the study also found that the average teen has an impressively accurate understanding of the price of a home: Of the 97 percent who said they would own a home, they estimate paying on average $274,323 for their first one. The median cost of a new home in June was $273,500, according to the U.S. Census Bureau.

Not only are teens significantly optimistic about their home buying, but 82 percent also said home ownership is the most important part of the American Dream, according to the survey. Way to go teens!

Housing Could Rise Even Further This Fall:

Autumn is historically the start of the slow season for home sales, but after a good spring and summer, wrought with still-tight supply and higher costs, the stage may be set for another small pick up in U.S. housing this fall, at least according to a new report.

More sellers are lowering their price expectations, because the number of homes that sold above list price in July was down nearly 26 percent from a year ago, noted in the report. That is the biggest drop of the year. Lower prices, still-low mortgage rates and increasing supply could push sales higher.

Twenty-seven percent of homes sold above their list price a year ago, compared with 20 percent this July. Home prices rose 7.4 percent nationally in July from a year ago, according to CoreLogic, but the gains have been shrinking steadily. That includes sales of distressed homes, which are slowly becoming a smaller share of the market. It is the 29th straight year-over-year gain in prices. 

With Consumer Confidence increasing, interest rates very low and more supply of homes entering the market at more realistic prices - the stage is set for more units across the U.S. to move.