Whether you're looking to purchase a new owner-occupied property or build a bona fide real estate investment portfolio, it's in your financial interest to find novel ways to maximize your profit potential. In an uneven real estate market, tax credits and deductions are crucial to this effort.
What Is a Real Estate Tax Credit?
Like other types of tax credits, real estate tax credits are designed to reduce the "bottom line" tax burdens of the individuals who claim them. In other words, real estate tax credits allow taxpayers to reduce the total dollar amount that they must forward to state and local revenue-collecting authorities. Although most tax credits aren't indefinite in duration and may come with onerous burdens of proof, they shouldn't be beyond the understanding of most savvy homeowners and landlords.
What About Real Estate Tax Deductions?
Since they indirectly reduce tax burdens by shrinking taxpayers' "top line" income figures, tax deductions are regarded as less powerful than tax credits. For instance, a deduction that results in a $2,000 taxable income reduction might result in a net tax burden reduction of $500 or so. An identically sized tax credit would result in a "full" tax burden reduction of $2,000. Nevertheless, there are a number of popular real estate tax deductions that benefit tenants, landlords and owner-occupants.
New Home-Buyer Tax Credit
Under the terms of the New Home-Buyer Tax Credit, first-time buyers are entitled to reduce their tax burdens by 10 percent of the total value of their new home. If the home's total value exceeds $80,000, claimants may reduce their applicable-year taxes by a flat rate of $8,000. Since the collapse of the U.S. housing market in the late 2000s, this credit has been extended several times. Since it's designed to help owner-occupants, it applies only to traditionally defined "primary residences."
New Markets Tax Credit
The New Markets Tax Credit primarily benefits real estate investors, property management corporations and real estate nonprofits. The credit's structure is far more complicated than that of the New Home-Buyer Tax Credit. Despite its complexity, the NMTC has existed in one form or another since 2000 and has aided the construction or rehabilitation of thousands of residential properties in under-served areas. In order to qualify, a real estate investor must commit to providing financing for the construction of low-income housing in neighborhoods that suffer from above-average rates of unemployment or poverty. The maximum value of the credit currently sits at about 39 percent of each claimant's total real estate investment.
Low-Income Housing Tax Credit
Although it's designed to achieve similar aims, the Low-Income Housing Tax Credit is a bit less complex than the NMTC. In its current iteration, this credit benefits landlords, builders and investors who invest in low-income housing projects. Unlike the NMTC, the LIHTC doesn't restrict its benefits to impoverished Census tracts. It simply requires investors and developers to attract low-income residents with below-market rents and maintain a suitable proportion of rent-controlled units.
Rehabilitation Credits
Some of the most popular real estate tax credits are designed to benefit investors and homeowners who successfully execute renovation and rehabilitation projects. Those who perform such work on pre-1936 properties can reduce their total tax burdens by 10 percent of the total value of the renovations. Nationally designated historic structures may be eligible for a 20 percent tax credit. Storm-damaged properties generally attract even larger credits.
Applicability and Expiration
Each of these tax credits is subject to a far-reaching and ever-changing slate of caveats and qualifications. For instance, the LIHTC requires claimants to reserve at least 40 percent of the residential units in a covered property for individuals who earn less than 60 percent of the surrounding area's median annual income. Since these credits tend to expire within five to 10 years of their enactment, it's important to keep abreast of pertinent political developments.
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