Would someone want to rent your property?

Sure, it sounds good, but why would someone want to rent your property? Here are some ideas:

• Special events. If a big event is in town, consider renting out your home for participants and fans. Common examples include:
  • Sporting events
  • Concerts
  • Golf tournaments
  • Conferences and expos
  • State high school tournaments
• Vacation home rental. If you have a cabin or cottage, consider renting it out for two weeks. If you find responsible renters, you may have an opportunity to find reliable repeat renters each year.
• Hotel alternatives. Oftentimes, travelers from other cities and countries would love to rent out homes or rooms within homes while traveling. This lets travelers have a real local experience.

Know the risks of a tax-free rental

The hassle factor needs to be considered prior to taking advantage of this tax-free rental income opportunity. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also, remember that if you rent out your property for more than 14 days, all rent received is taxable, and the rental income rules apply. And don’t forget to review any local regulations prior to renting your property. Home rental sites like Vrbo and Airbnb can help you better understand your options for renting your property. Before taking any action, contact our RRBB advisors to have your situation reviewed.

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The OBBBA changes

In 2024, you could only take a maximum of $10,000 as an itemized deduction on Schedule A for taxes of any kind. To make matters worse, this limit was the same for single filers and married filing jointly taxpayers, making it one of the most severe marriage penalties in the tax code. Many taxpayers who typically itemized deductions found themselves taking the standard deduction.

But effective for tax years 2025 through 2028, this limit of tax deductions is increasing to $40,000. This will result in many individuals once again itemizing their deductions.

Itemizing your deductions

Now is a great time to conduct a quick review of your situation. You’ll want to see if next year’s tax return can be filed with itemized deductions. Here are some who should undergo this review:

1. High state income taxes. If you paid significant state income taxes, you will need to conduct this planning review.
2. High property taxes. If you have high property taxes, take the time to calculate what your total itemized deduction could be with the new $40,000 limit. You may also want to consider this if you have multiple properties that could have applicable taxes.
3. Multiple homes. If you own a cabin or applicable vacation property in addition to a primary residence, this could be enough to bring you over the standard deduction limit.
4. Small business owner. Suppose you own a small business that is a flow-through entity, like a partnership or a subchapter S corporation. In that case, your state income tax on this business activity might be limited on your personal tax return. This again would warrant a review.

Potential planning steps

If you think the higher deduction limit for taxes may be of benefit, you may want to consider ways to maximize your itemized deductions. Things to consider:

• Increasing your use of charitable giving by giving more or placing multiple years of giving into one year.
• Prepaying property taxes. Remember, your tax return is on the cash basis. So, a property tax bill due at the end of the year can apply to the year you actually pay the bill.
• Understanding your qualified interest expense. Consider any interest paid on qualified home debt and the new interest deduction on U.S.-sourced new car loans.

The key takeaway is to plan now to take full advantage of the opportunity to reduce next year’s tax obligation. Contact our RRBB advisors for more information or if you have any questions.

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About property taxes

Property taxes are typically calculated using two factors:

1. The assessed value of your property (set by your local assessor)
2. Your local tax rate (set by schools, counties, fire departments, etc.)

Why does this matter? Even if your home’s value doesn’t change, your tax bill can go up if any of the taxing authorities raise their rates. And while setting the tax rates is usually a legislative process, establishing the value of your property often involves judgment.

Lower your property tax bill

• Understand and adhere to the calendar. Challenging the value of your property requires an understanding of the process and hitting the proper deadlines. If there’s an appeals process, be aware of it and ensure you meet their deadlines; otherwise, you may be out of luck for that year.
• Challenge your property’s assessed value. You have the right to appeal your property’s assessment by filing a formal appeal with your local assessor. If you can show your home assessment was more than its worth compared to similar homes, you might get your tax bill reduced. If you wish to appeal, you must act promptly. There are typically just a few weeks each year to appeal your assessment. So mark the date and gather evidence early if you plan to dispute it.
• Do your homework! Collect actual sales of similar properties that show a lower sales price, and be ready to defend the condition of your property if it is an older home. Assessors are quick to dismiss complainers with no facts to back them up.
• Claim all exemptions and eligible tax breaks. Contact your local assessor’s office to see what exemptions you can claim. Many states and counties offer breaks for veterans, individuals with disabilities, low-income households, older residents, and those residing in designated areas, such as historical districts or disaster zones.
• Compare local tax rates before making a purchase or relocating. Property taxes are determined locally by counties, cities, or school districts. This means two identical homes in nearby ZIP codes can have drastically different tax bills. Always check the local tax rate before buying or moving. Examine the history of property taxes in your target neighborhood to see how they have changed over the past several years. Then compare it with other homes in the area to ensure the rate increase is consistent.
• Calculate the tax impact of renovations before making a building decision. Adding a new deck or renovating your kitchen may increase your home’s assessed value, especially if the county discovers it through permit records or a property inspection. So even if you don’t sell your home, upgrades can mean a bigger tax bill. Some areas automatically reassess properties after building permits are issued. So always factor in long-term tax implications when upgrading your home.
• Review your lot details for unused land. Your property tax bill covers not only the value of your house, but also the value of your land. You may be able to adjust your bill if part of your property is unusable, like wetlands, steep slopes, or areas with easements. That is something you may want to ask your assessor.

What homeowners should know

One of the few taxes you can actively challenge and reduce is property taxes. But you must understand how the system works to do that. So, don’t just pay the bill without reviewing it. Understanding the details can often result in significant savings. Contact our RRBB advisors if you have any questions or for more information.

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Installment sale defined

Generally, you create an installment sale when you receive payments for sold property in the tax year of the sale and at least one other tax year. For instance, if you sell real estate for a profit in 2025 and receive payments through 2028, your real estate transaction is considered an installment sale.

Tax implications

An installment sale creates a tax event in each year you receive payments. In the above example, part of your gain is taxable in 2025 and each year through 2028. Note that property held longer than one year qualifies for favorable capital gains tax treatment. The current tax rate on long-term capital gains is from 0% to 20%, compared with the top ordinary income tax bracket of 37%.

You also have the option to pay all the tax due on the sale upfront. Thereby, you avoid tax on the installments in future years. In some cases, you can reduce your overall tax bill this way, although it may require assistance with tax planning.

Benefits of an installment sale

With an installment sale, you may be able to lower your total tax on the sale of the property by spreading this income out over several years. In addition, the buyer will often pay a rate of interest to you higher than a typical bank loan for the remainder of the amount due.

Installment sale tax traps

Related-party caution. If you sell property to a related party and the property is then disposed of within two years, in most cases, the entire remaining tax becomes due immediately. The tax law definition of related parties is more expansive than you might think. It includes:

• Spouses
• Children
• Grandchildren
• Siblings
• Parents
• A partnership or corporation in which you have a controlling interest
• An estate or trust

To avoid this major tax surprise, consider stipulating in the contract that the property can’t be disposed of within two years.

Depreciation recapture potential. Also, be cautious if you took any depreciation on the property in prior years. In some circumstances, you will owe extra tax related to that depreciation when you sell the property.

Gains, not losses. Be aware that installment sale treatment is only available for gains, not losses. Other special rules may apply, so reach out if you need advice specific to your situation.

Of course, current tax discussions in Congress may impact how installment sales and long-term capital gains are taxed in the future. If you’re planning an installment sale, consider reaching out for a consultation to discuss the tax implications. Contact our RRBB advisors if you have any questions.

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1. Your Home

Your home can create unexpected tax liabilities. Property value appreciation, home improvements, and mortgage refinancing influence how much tax you pay. You might pay higher property taxes when your home’s value increases substantially. Selling a home can also lead to capital gains taxes if you’ve lived in the property for less than two years or exceed the home sale exclusion amounts.

Tax Planning Tips for Your Home:

• Get a professional property assessment to ensure you’re not overpaying property taxes. If so, know your location’s time frame and process to amend your property’s value in their formula.
• Consider timing home improvements to manage potential tax consequences. Be smart about when assessments are applied to your location’s property value.
• If selling, understand capital gains exclusion rules ($250,000 for single taxpayers, $500,000 for married couples).

2. Your Investments

Review your refinance closing disclosure to identify deductible mortgage points or fees. Investment income can impact your tax bill. Capital gains, dividend distributions, and frequent trading can all cause tax consequences. Different investments also face different tax rates: short-term capital gains get taxed at higher ordinary income rates, and long-term gains typically receive more favorable treatment.

Tax Planning Tips for Your Investments:

• Implement tax-loss harvesting to offset capital gains.
• Hold investments for over a year to qualify for long-term capital gains rates.
• Consider tax-efficient investments like index funds or ETFs.
• Maximize contributions to tax-advantaged accounts like 401(k)s and IRAs.

3. Your Retirement

Retirement accounts offer financial opportunities. But they can also cause tax pitfalls. Required minimum distributions (RMDs), early withdrawal penalties, and the tax treatment of different retirement account types influence your tax bill.

Tax Planning Tips for Your Retirement Accounts:

• Understand RMD rules and plan withdrawals strategically. Sometimes, the most cost-effective plan withdrawals occur long before the RMD rules come into play!
• Consider tax-efficient Roth conversions to manage future tax liability.
• Maximize health savings account (HSA) contributions as an additional retirement account.
• Explore catch-up contributions if you’re age 50 or older.

4. Your Life Events

Significant life changes can dramatically change your tax situation. Marriage, divorce, having children, changing jobs, or experiencing considerable income shifts can all reshape your tax liability.

Tax Planning Tips for Life Changes:

• Reassess your filing status, as life changes may affect your tax bracket and deductions.
• Track new deductions and credits, as life events like adoption or education expenses may qualify for specific tax breaks.
• Understand the age triggers built into the tax code and plan accordingly. This is especially important to understand as your children get older.

Sometimes, your tax plan will show you an unavoidable, upcoming tax event, but you can plan for it to avoid surprises. But other times, your plan can help lower your tax liability, so it is best to begin as soon as possible. Contact our RRBB advisors if you have any questions or are ready to start your tax planning today.

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What basis means in tax terms

The IRS describes basis as:

The amount of your capital investment in a property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.

In plain language, basis is the cost of your property as defined by the tax code.

There are a few different types of basis that apply to different situations, including cost basis, adjusted basis, and basis other than cost.

The different types of basis

Cost basis. Your basis usually starts with what the item costs. The cost basis also includes sales tax paid, freight, installation, testing, legal fees, and other fees to purchase the property. If you acquire a business, you must often allocate the purchase price to each of the assets to establish their basis.

Tip: Retain records of any major transaction. Ensure the documentation includes all allowable costs that could be applied to your basis. This will help reduce taxes when you sell or dispose of the property.

Adjusted basis. When you sell, exchange, or dispose of property, such as your home, you may have to adjust its basis to account for changes to the property since you acquired it. This is known as its adjusted basis. A common example of adjusted basis is when you add the costs of capital improvements to property that have a useful life for more than one year.

Adjusted basis can decrease the value of property as well. This is the case when property is affected by things such as casualty or theft losses, depreciation, and other deductions.

Home tax tip: Adjusted basis applies to many home improvements. These could include a full roof replacement, adding a room to your home, or even special assessments for local improvements. Create a folder and retain all documentation that could add to your home’s basis. It may lower your capital gain when you sell your home.

Basis other than cost. What is the basis when you inherit property, receive property for services, or receive property as a gift? In most cases, the basis is the fair market value of the item. This is the price a willing buyer would pay for the item, and a willing seller would be willing to receive for that item. But there are also special basis rules for:

• Inherited property
• Like-kind exchange of property
• Involuntary conversions
• Property transferred to a spouse

Should any of these situations apply to you, please ask for a review of your circumstances, as establishing basis can become fairly complex. Contact our RRBB advisors today.

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• But what if the tax law changes?
• What if you rent out your home?
• What if you have a home office?
• What if you cannot prove the cost of your home?

Your best defense against a potentially expensive tax surprise in the future is proper record retention.

The home sale tax risk

The gain exclusion is so high that many of us are no longer keeping track of the true cost of our home. This mistake can be costly. Remember, this gain exclusion still requires documentation to support the tax benefit.

To calculate your home sale gain, take the sales price received for your home and subtract your basis. The basis is an IRS tax term that equals the original cost of your home, including closing costs, adjusted by the cost of any improvements you have made to your home. You might also have a reduction in home value due to prior damage or casualty losses. As long as the home sold is owned by you as your principal residence in at least two of the last five years, you can usually take advantage of the capital gain exclusion on your tax return.

Keep the tax surprise away

Always keep documents that support calculating the true cost of your home. These documents should include:

• Closing documents from the original home purchase
• All legal documents
• Canceled checks and invoices from any home improvements
• Closing documents supporting the value when the home is sold

There are some cases when you should pay special attention to tracking your home’s value:

1. You have a home office. When a home office is involved, it can impact the calculation of the capital gain exclusion. This is especially true if you depreciate part of your home for business use.
2. You have lived in your home for a long time. Most homes will rise in value. The longer you stay in your home, the more likely its value will rise over time. For example, a sizable gain can occur when an elderly single parent sells their home after living in it for over 40 years.
3. You live in a major metropolitan area. Certain areas of the country typically have rapidly increasing property values.
4. You rent your home. Any time part of your home is depreciated, it can impact the calculation for the available gain exclusion. Home rental can also impact the residency requirement calculation to receive the home gain tax exclusion.
5. You recently sold another home. You can only use the home sale gain exclusion once every two years. If you recently sold a home for a gain, keeping all documents related to your new home will be critical.

The best way to protect this tax code benefit is to keep all home-related documents that support calculating the cost of your property. Contact our RRBB advisors if you wish to discuss your situation.

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New rules for homeowners

• Loan amount limits for mortgage interest deductions. For mortgages starting on or after December 15, 2017, you can deduct interest on up to $750,000 of the loan. However, for mortgages initiated before December 15, 2017, it is $1 million. If your original mortgage is above the threshold, a calculation will have to determine the deductible amount of interest. You can’t simply deduct the full amount of interest on your Form 1098.
• Proceeds not used to buy a home add complexity. Proceeds from home equity debt that are not used to build, buy, or substantially improve a qualified home are not tax deductible. This includes mortgage or home equity proceeds used to pay for college expenses, debt consolidation, or other purposes. Mortgage companies issuing these loans will still send you a Form 1098. But it’s up to you to prove how you use the funds during the current year and any prior year.
• Mortgage points require a review of settlement statements. Points are paid as a way to obtain a lower interest rate. Generally, points are deductible in the year they are paid, but they have more restrictions than mortgage interest. Points for a refinance of an existing mortgage, for example, may need to be deducted over the life of the loan. If you bought or refinanced a home this past year, a review of your mortgage settlement statement may be a requirement to ensure proper tax treatment of the cost of your points.
• Mortgage insurance premiums are not deductible. If you pay mortgage insurance, your mortgage insurance premiums are not deductible. This on-again, off-again deduction is now in the off position.

Confused?

With the rise in interest rates over the past several years, more taxpayers will be itemizing their deductions due to mortgage interest. So for each Form 1098 you receive, make a note to explain what the loan is for. This will ensure a proper deduction. Contact our RRBB advisors if you have any questions or concerns.

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Selling property to family

1. Installment sales. When selling your property over two or more years, your transaction is deemed an installment sale. With an installment sale, you can defer tax on your gain until the tax year in which payments are received. However, if you sell the property to a related party who disposes of it within two years, the remaining tax is due immediately!

Tip: To solve this problem, insert language in the legal agreement with your related party that does not allow the disposition of the property within two years.

2. Selling at a discount. If you’re selling a house to a related party, you may wish to give that person a sweetheart deal. Unfortunately, the IRS may reclassify the transaction as a gift if the property sells at considerably less than its fair market value (FMV). Fortunately, you have some wiggle room. If you discount the sale by less than 25 percent, you should be OK.

Tip: Err on the side of safety by having an appraisal of the property before the transfer date or building documentation that justifies the FMV.

Other options to consider

3. Transferring remainder interests. Sometimes, a homeowner may transfer an interest in a home to his or her estate while continuing to live there. Although this may meet specific objectives, the estate can’t take advantage of the $250,000 home sale exclusion ($500,000 for joint filers). However, the exclusion becomes available if the heirs subsequently meet the two-out-of-five-year ownership and use requirements.

Tip: Before transferring the interest in your home to anyone (including a trust or an estate), understand the impact of this action on the tax-free home gain exclusion.

4. Like-kind exchanges. Instead of selling a business or investment property, an owner may trade for another similar property, hoping to defer or avoid taxable gains. Recent legislation eliminates tax-free exchanges of like-kind properties, except for qualified real estate transactions. Tax is generally deferred until the replacement property is sold, but the tax law imposes a two-year holding requirement on the parties to the deal. Alternatively, you may qualify under a particular exception, such as proving tax avoidance wasn’t the purpose of the sale.

Tip: Related property transactions of this type can be complex. Ask for a review of your situation before trading any property.

Transferring assets, including property, to family gets the attention of the IRS. Should you contemplate this, contact our RRBB advisors for assistance before moving forward.

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Tax benefits of your home

The home gain exclusion. When you sell an asset for a profit, it creates a taxable event. You can exclude up to $250,000 of these gains if the asset is your primary residence. If you are married and filing jointly, you can exclude up to $500,000. Special rules apply, but this is a major tax benefit of home ownership. You must live in your house for at least two of the previous five years to qualify. Start planning if you think you’ll sell your house to qualify for this tax break.

Itemized deductions. Mortgage interest and property taxes are two deductions you can claim as a homeowner. The interest is deductible on the first $750,000 associated with loans secured by your primary and secondary residences ($1 million for mortgages underwritten before 2018). However, up to $10,000 of property taxes may be deducted. You may also deduct points paid as an itemized deduction over the life of your mortgage. You need to itemize your deductions to take advantage of these tax breaks. Consider bunching your mortgage interest and property taxes with other itemized deductions to try and exceed the standard deduction for your filing status. Some examples you can look into would be charitable contributions, taxes, and excess medical expenses.

Free rental income. You can rent out your home for up to two weeks and not claim the income. While you cannot deduct expenses in this scenario, this is a great tax break if your home is next to a popular landmark or a major event. Keep track of how many days you rent out your home so you don’t exceed the 14-day limit. If you rent your house for 15 days over a given year, you’ll owe taxes on all rental income for that year, including the first 14 days.

Home office deduction. If you use a portion of your house exclusively as a home office, you may be able to deduct certain expenses. These expenses may be from mortgage interest, insurance, utilities, and repairs. To qualify for the deduction, you must regularly use this portion of your house exclusively for business purposes. So, be sure to understand the limitations of this deduction.

Maximize your savings

Your house is a great place to control the amount of tax you owe, but only if you know the rules and can apply these rules to your situation. Use this information as a starting point to see if there are ways to leverage your home’s tax benefits. As always, please contact our RRBB advisors with any questions or concerns regarding your tax situation.

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