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Government collects nearly $10,000 for each man, woman and child in America.
Use these Quick Jumps to find answers on Tax Questions.
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Tax Return Software
The early versions of most consumer tax preparation software limited many important schedules to just a few copies. When you do taxes by hand you can just make a copy of the form and move on, but a computer program integrates everything so you cannot add to what is provided in the program.
The first versions of TurboTax that were designed for consumers allowed just three copies of Schedule E, enough for just nine properties. Later versions increased to five copies of Schedule E. Consequently, real estate investors, who owned more than fifteen properties, and wanted to do their own taxes with computer software, were forced to buy the much more expensive and difficult to learn "Professional Edition", designed for firms like H & R Block.
File Electronically
In 1998, 900,000 taxpayers did their own returns on a personal computer and sent them directly to the IRS electronically. That might seem like a lot, but it amounts to less than one percent of the 100 million-plus individual returns the feds received. The total number of returns funneled $792.6 billion into the federal government, and $169.2 billion into state and local governments, according to the Tax Foundation.
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The Alternative Minimum Tax:
ATMT was adopted in the 1980s as a part of tax reform. It has since had a depressing effect on overall investment in depreciable real estate by not allowing many property owners to take adequate deductions for depreciation on their tax returns. This, of course, leads to lower values for existing investment property and less incentive to invest in new construction of affordable rental housing.
Half of the 2 million households expected to run afoul of the alternative minimum tax--designed to prevent the wealthy from sheltering income--earn $30,000 to $100,000. By 2007, 8.4 million taxpayers, or 1 in 16, should owe the AMT, which imposes a heavier burden than ordinary income tax by taxing items normally removed from Uncle Sam's reach.
The so-called check on the rich has become a middle-class headache because while incomes have risen with inflation, the AMT's exemptions of $45,000 for married couples and $33,750 for single taxpayers have been the same since 1993.
Many real estate and investment associations are lobbying heavily for modification or repeal of the onerous provisions of the Alternative Minimum Tax that would lead to removal of the depressing aspects of the tax and encourage more new investment in the US economy.
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At-Risk:
Real estate debt that a partnership or limited liability company (LLC) is personally liable for could be treated as qualified non-recourse financing under the at-risk rules if no other person in liable for the debt, according to proposed IRS rules. Under the proposed regulations, the ban on personal liability would not disqualify debt for which a partnership or LLC is personally liable if the entity's only assets are either real property used in the activity of holding real property, or such real property and other property incidental to the activity of holding real property, and if no other person is liable for the debt.
The regulations also provide that if a person is liable for a portion of the debt, the remainder could be treated as qualified non-recourse financing if it meets the other requirements.
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Capital Gains:
There is little doubt that the present capital gains tax is regressive to the US economy. The rate, as it applies to real estate, penalizes gains that have come solely as a result of inflation. That tax on gain in value often deters owners from selling existing properties to new investors who would normally invest vital new capital for up-grades and modernization of America's deteriorating urban rental housing.
Most real estate and investment groups are pushing for legislation that would replace the present capital gains tax with a straight 50 percent exclusion and index both new and existing assets for inflation. That would certainly be a good initial step toward encouraging investment in productive assets like rental housing. Most economists also believe that depreciation recapture provisions for real estate should not be added to the tax code.
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Tax Relief Act of 97:
The tax Act provided some relief on real estate investments by reducing capital gains from 28% to 20% if assets have been held for 18 months or longer. (28% tax-bracket.) However the rate would be 25% on any recapture of deprecation when there is a gain on a sale.
Homeowners, (spell that v o t e r s) had taxes eliminated on capital gains of up to $500,000 for the principal residence of a married couple filling jointly. Single taxpayers enjoy a $250,000 exemption. There may be an upside for rental property owners, however. Millions of homeowners who have been locked into their present home by the prospect of high capital gain taxes on the sale of a home, may now choose to sell, invest their equity and rent if they wish.
Real estate investment groups and associations must work together to support efforts to reduce the capital gains tax to a level that will encourage new investment, and infuse money into housing projects in desperate need of rehabilitation and modernization.
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Like-Kind Exchanges:
Present tax law allows for a liberal interpretation of like-kind exchanges so that property of one kind can be exchanged for property of another kind without creating a taxable event. These exchanges encourage and enable an orderly transfer of property ownership which usually results in fresh new management ideas and attitudes.
Some more liberal and anti-business members of Congress have proposed that the like-kind exchange rules be narrowed significantly so that only very similar use properties can be exchanged without resulting in taxable gains. An apartment building could only be exchanged for similar rental housing; shopping centers for shopping centers, and vacant land could only be exchanged for other vacant land. Any reasonable person should be able to identify the obvious detrimental effect such a narrow definition would have on expansion of the economy by drastically reducing the commerce in investment property. See our page on the subject. There is also extensive information in our new Real Estate Investor's Web.
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Low-Income Housing Tax Credit:
(LIHTC) The 1986 tax reform act took away most incentives for investing in low-income rental housing by changing depreciation from fifteen to twenty seven and a half years. Many investment analysis professionals concluded that the act reduced the value of new investments in rental housing by about eighteen percent.
The feds responded by creating temporary Low-Income Housing Tax Credits to soften the effects on new or rehabilitated low-income housing. Essentially the act allows investors in properly set-up and registered low-income projects to take nine percent a year of their adjusted basis as a tax credit. Investors receive the annual credit of up to their tax bracket times $25,000. The credit must be spread out over 11 years. It results in about a seventy percent recapture of investment over that period.
In 1993 the Omnibus Budget Reconciliation act made the Low-Income Housing Tax Credit program a permanent part of the Federal Tax Code. This permanency led to more active involvement by both individual and corporate investors. That increased the market demand for the credits which are now often sold to raise equity capital for housing projects. In fact, the price that investors pay for the credits is now twenty eight percent higher because permanence has attracted more investor competition. The result has been more money available to fill the "cost Vs value" gap that exists in providing decent, safe affordable housing for low and moderate income tenants.
We have also provided a page of answers to FAQs about the Federal Low-Income Housing Tax Credit program and a summary page. |