INCOME RELATED TAX STRATEGIES ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 1- REAL ESTATE: Low interest loan(s): -------------------- a- Do you have an old, low interest rate mortgage on your principle residence or on a rental or business property? Ask your lender if they would be willing to offer you a discount for an early payoff. CAVEAT(S): Understand, that any difference between an outstanding loan balance and the (discounted) amount paid to payoff your loan, may be considered as ordinary income. Also, you will lose a tax advantage in terms of deductible interest (mortgage interest) against your reported income. This is an area where you will have to weigh all considerations of advantages/disadvantages to this type of transaction. Sale of your property: --------------------- a- Any gain made on the sale of your property will be tax free if you re-invest the full selling price of your old home against the price of your new home. You must buy your new home within two years before or after the sale of the old one. b- You can take a one time $125,OOO exclusion against the gain from the sale of your home, if you are a taxpayer over the age of 55. Home equity loans: ----------------- a- You can get a home equity loan (second mortgage) against your residence for most anything that you may want. In fact, it can be set up like a checking account where you merely write a check for the article that you want to buy. Not unlike a regular checking account. b- An equity loan will probably be given at a lower interest rate (maybe one or two percentage points) then a personal loan because the equity in your home is used for collateral for the loan. c- And therein lies some of the problems, that are inherent with this type of loan. One major problem of course, is that since you are using the equity in you home to secure the loan, you stand the possibility of losing your home, if you default on the second loan. A borrower should be fully aware of the pit-falls involved, when trying to obtain this type of loan. Be aware of balloons for this type of loan. The repayment figures might be figured on a twenty year repayment schedule, only to find that in five years say, your lender may decide for full and immediate payment, after you have only paid a small portion on the principal. The amount that would be considered for a loan, would be the difference between the outstanding balance owed for your first mortgage on your home and the appraised value. So- it really makes sense to shop around for the best deal that you can get for a home equity loan. Just like you would when looking for a first mortgage on a new home. d- There are times when this type of loan makes sense. A large medical expense would be one reason. An addition to your present home would be another. And a child's education expenses would be a third good reason. e- Home equity loan interest payments, like your normal interest payments on a first mortgage, are fully deductible. Since all other types of loan interest rate payments are now, non-deductible, this type of loan makes the most sense. Rental properties(s): -------------------- a- If you "actively participate" in a real estate investment, such as owning a 1O percent or more interest in the property, with no limited partnership agreements, participate in management decisions such as approving new tenants, setting rental terms and determining capitol or repair expenditures, then you may shelter up to $25,OOO against earned salary (etc.), investment income, dividends, gains from investment sales and interest. b- This allowance ($25,OOO) for rental real estate, phases out $1 for every $2 when your adjusted gross income exceeds $1OO,OOO. The allowance is $5O,OOO for a married couple filing separate returns. c- Your adjusted gross income will be calculated in lieu of any IRA contributions, taxable social security benefits and passive losses. d- For individual's with a modified adjusted gross income exceeding the $15O,OOO level, this allowance will be entirely eliminated. e- All real estate rental losses are subject to the limitation on passive activity losses, if an individual's adjusted gross income exceeds the $15O,OOO level. Hobby income loss rules: ----------------------- a- If you have a hobby that has generated an income for you after expense deductions, for at least three out of five consecutive tax years, the IRS will consider your hobby as an activity for profit and any resulting losses that you have incurred, may be deductible. b- The time period is extended from two out of seven years, if your activity consists of breeding, training, showing or racing horses. Medical deductions: ------------------ a- Your medical expenses must exceed seven and a half percent (7 1/2%) of your adjusted gross income to qualify as a deduction and the definition of deductibles has been expanded by the IRS. So- make plans to take advantage of as many medical deductions as you can. b- Deductions can be taken for specific treatments in the areas of diagnosis for the treatment and prevention of diseases, or for affecting any structure or function of the body. The deductions are not allowed for general health improvement. c- Medical bills for another person can be deducted provided that you have paid for more than half of that person's support either in the year that the bills were generated or the year they were paid. d- You can also deduct bills paid for a former spouse, so long as you were married at the time when the bills were incurred. e- Deductions for surgical, hospital and laboratory expenses and transportation costs for a transplant donor are allowed. A person that is being considered as a prospective donor, even if found as unacceptable, can deduct expenses incurred. f- Recipients paying expenses, will get the deductions. g- Generally, other deductibles include: birth control pills and other prescription drugs, vasectomies, legal abortions, face-lifts and hair transplants.