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Three Important Tax Benefits of Owning Real Estate

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Tax season can be a stressful time for everyone. No matter how much you prepare, it’s not unusual to get to February and learn that you owe the Government more than you originally thought. This year is particularly complicated in light of COVID-19 and the extension of the new tax deadline to July 15, 2020. 

While there is no way to avoid the stresses of tax season this year, there are ways that you can make it go a little smoother next year. One of the most impactful things that you can do in the year ahead is purchasing a home. 

There is a handful of tax benefits that Illinois homeowners see around tax season including deductions, credits, and tax-free profits. 

Deductions

When you are looking to legally lower your tax liability, a deduction is one of the easiest ways to do so. When looking to deduct, you should consider what expenses you have incurred over the year, and subtract it from your gross income. When you own a home, there are a variety of ways to achieve this. 

  • Mortgage Interest Deduction

This allows you to deduct interest paid on your mortgage. There are different regulations and limits set on this depending on marital status and how you file. Taxpayers can deduct mortgage interest paid on up to $750,000 in principal. Investment property mortgages are not eligible for the mortgage interest deductions, although mortgage interest can be used to reduce taxable rental income. 

  • Mortgage Point Deduction

Many homeowners also have eligibility to deduct paid mortgage points from their taxes.  Mortgage points are fees you pay in order to decrease the interest rate. Each of these points costs 1% of the overall loan amount. If you choose to pursue this route, you can deduct the points over the life of the loan or in the year they were paid.

  • State and Local Taxes Deductions

When purchasing a home, it is important to consider the deductions for state and local taxes. This includes any property taxes that you pay on your home. There is a $10,000 limit per/household for these deductions. 

Many Illinois residents find this deduction cap to be a disadvantage because of the state’s higher property tax bills.

  • Home Office Deductions

If Americans have learned anything from the latest COVID-19 pandemic, it is that many jobs can function remotely from the home. If you are considering adding a home office to a new home, then this is another valuable item that you can to write off. 

In order to qualify for this deduction, the space that you assign as the office must be used regularly for business. The space must also be exclusively for business. This means that you cannot just add a desk to a bedroom and write off the entire space. 

Credits

In addition to the tax deductions that you can receive when you own your own home, you can also be entitled to credits that reward you for making your home more energy-efficient. The residential energy-efficient property credit will offer 22% to 30% of the cost back to you if you make improvements in the home that follow a more Green living standard. It is an incentive set in place to help encourage homeowners to make eco-friendly changes to the home. Some of these changes might include but are not limited to, adding solar panels, a solar water heater, wind turbines, or geothermal heat pumps. 

Tax-Free Profit

If you are looking to sell your home, you can still receive tax benefits in the coming year. Unlike most profits, the capital gains accumulated when selling a house can be tax-free up to $250,000 (if you are single) or $500,000 (if you are married filing jointly). In order to qualify for this benefit. The house must have been your primary residence for at least two out of five years before the final sales date.

Remember to bring your Settlement Statement to your accountant if you purchased or sold a real estate during the tax year. If you are looking to purchase or sell a home or investment property and would like to know more about tax benefits and consequences, contact your accountant and Tannehill Law today.

Three Steps to Take to Prevent COVID-19 From Plummeting Your Investments

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In times of a pandemic, the world can go into disarray in every sense. This behavior is not without reason. When the medical field starts reaching full capacity and the traditional flow of supply and demand is thrown off without warning, there can be an understandable amount of fear and frustration.

One area that really sees an impact during these emotional times is the economy. If you are looking to keep your investments afloat during the economic hardship of a pandemic, the task is not impossible, it just takes a few strategic steps.

Avoid Impulse Purchases

As we have all witnessed in the past couple of weeks, times of global hardship can cause the population to react in a variety of ways. A major pattern seen during these times is impulse buying. This can be as simple as clearing the shelves of toilet paper, or as drastic as investing in every stock that is selling for below-market value. No matter where your impulse is calling you to spend, it is important to take a step back and think strategically. What you do with your money during times of global crisis is more detrimental to your finances than at any other time. When the economy is in disarray, it is important that you save the money that you have and only make well-thought-out purchases and investments.

Watch and Study Numbers

While it is important to avoid spending money impulsively, many have already invested money in IRAs and stocks, and these people might find benefit in moving their investments around to more feasible markets. If you have money invested that you have the flexibility to gamble with, then you might consider moving your own investments depending on the wave of the economy and your long term plan with the money. If you are looking to get the most out of your investments, in the long run, it might be worth watching the numbers in a variety of investment markets. By watching the number you might be able to identify areas that are coming in significantly below market value, and you might be able to enter the market while it is low. This does not mean to jump impulsively into an investment market, it simply means to watch the numbers and try to enter the new investment game when the numbers indicate that it is likely the time to jump.

Look Into the Real Estate Market

If you have previously considered investing in property, or if you feel a pull to remove your investments from the stock market but don’t know where to invest instead, this pandemic may provide a rare opportunity for you to enter the Chicago area real estate market at a great price. In the panic of a pandemic, people often begin to list their houses out of fear. This creates a market that is much more catered to the buyer, as many people list their houses low and are more open than usual to negotiations in hopes of just getting out from under the immediate pressure of homeownership. If you have adequately prepared and saved to purchase real estate whether as a primary residence or an investment property, you could have an advantage over the market that you will likely never see in another circumstance.

If you are interested in investing in a new home or property while the market is low, and you are looking for an experienced attorney to guide you through the process from beginning to end to help ensure that you are getting the fairest deal, contact Tannehill Law today.

MOST IMPORTANTLY… do your best to stay safe and healthy!

The Benefits of Forming an LLC for Holding Investment Properties

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Over the past decade, investors have flocked to the real estate market. From house flips to rentals, a real estate investment can be a lucrative way to get more out of your extra income. However, when making an investment of this magnitude, it is essential to ensure that you are taking the path for best return. For many, this path might include forming an LLC to hold these investments.

What is an LLC?

LLC stands for “Limited Liability Company.” It is a separate entity formed to separate personal and business operations and limit personal liabilities that may occur.

Why Form an LLC? 

As mentioned before, an LLC keeps a divide between personal and business affairs. There are a variety of reasons people find this separation to be helpful when accumulating investment real estate: 

 

  • Liability Protection- Real estate is a significant investment, and like all significant investments, the payoffs can be huge, and so can the losses. When someone enters this market, they are prepared to gamble, however, they may be less likely to gamble with their family’s values. By investing under an LLC, you are personally protected from most liability claims that may arise with the property. For instance, if you rent out the property, and the renter gets injured on the property, they may file a lawsuit. If the property is held by an LLC, the suit will be filed against the LLC rather than against you personally, as an individual. 
  • Company Shares– Many people prefer to enter an investment with a trusted partner rather than taking on the entire gamble on their own. By forming an LLC, you can sell shares of the company to let multiple people in on the benefits and losses that the investment might experience. Additionally, creating a business operating agreement for the LLC partnership will allow a clear understanding of roles and expectations of the business and partners involved. 
  • Tax Write-Offs– No one likes a fight against the IRS, and while you can write business expenses off on your personal taxes, it can get a lot more complicated. For example, you may write off your cell phone plan because you use it for business, but you may be questioned if you also use the cell phone for personal use. Writing off expenses, under and LLC, tends to simplify the process, and allow you to get a fair return for expenses with less of a fight. Keeping expenses separate and clean under and LLC allow for better track of business and personal expenses when filing an annual tax return.  

 

When an LLC is Not The right Fit

While there are many benefits of forming an LLC to invest in real estate, there are also times when this option may not be the best fit for your unique interests:

 

  • Owner Occupied Residences- Many investors find luck by investing in multi-family homes or duplexes where the investor will occupy one of the homes and rent out the other unit. While this can be a successful business model, you may run into trouble securing financing for this plan under and LLC because you will be occupying the home. Additionally, individual tax benefits for an owner-occupied home outweigh the tax benefits of an LLC. 

 

Whether you are thinking about purchasing your first investment property, or your third, it is important for you to discuss your options to help ensure that you get the best deal while also avoiding any legal or tax consequences. A real estate attorney is an essential role in the process.

Contact Tannehill Law today if you are seeking professional legal guidance to assistance you in your next real estate investment. 

 

Five Reasons Your Chicago House Buying or Selling Experience is Hotter when the Weather is Cold

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The city of Chicago comes alive during the warmer months. People flood to the beach or Wrigley for a day in the sun.

This excitement seems to step down a notch during the winter months. Suddenly, people are rushing from one building to the other to escape the wind. They are curling into their blankets, and only leaving the house when they absolutely have to.

Winter in Chicago isn’t exactly the time that anyone wants to do much of anything, and that includes house searching.

Real Estate simply has more curb appeal in the spring, when the grass starts to get green again and the front foliage begins to fill out, however, what many people don’t acknowledge when looking to buy or sell a house, is all of the benefits they can experience if they choose to pursue the marketing in the winter.

Here are just a few reasons why buying or selling real estate during Chicago’s winter months can be more beneficial than entering the process in the spring/summer months:

Less Competition

Whether buying or selling, winter months become a less desirable time for people to move. As a result the inventory and demand is very low as most buyers and sellers tend to wait out the cold and start the buying and selling process in the springtime.  Less competition in the home search means far less negotiating required of both buyers and sellers. This helps to ensure a much smoother process for all involved.

More Pressure on Both Sellers and Buyers

In most cases, if someone is buying or selling their home during winter months, there is an urgency to move quickly. They may need to relocate, or they may be looking to upgrade to a home that better accommodates a growing family. Regardless of the reasoning, the combination of the need to sell or buy and less demand on the market puts the buyer and seller in a position to move quickly. Transactions with motivated buyers and sellers will often be a little more lenient on price and post-inspection demands. Sellers listing their homes during winter months are likely motivated to sell quickly.  Alternatively, Buyers who are motivated to move during winter months are typically more serious and ready to make reasonable offers.

More Year-Round View of the Home

During the summer months, there is one thing that an inspector can’t determine, and that is how well the house can handle the cold Chicago winters. If you buy a home during the winter, you will know when viewing the house just how well it can handle cold weather. You will be able to see the way the house looks without the disguise of foliage. You will be able to see how well the heater works, and most of all, you will be able to tell very quickly if there are any flaws in the insulation. Many summer buyers face a hard reality, not to mention a large utility bill, in the winter when they find that their new home can’t quite manage in the cold weather the way they did in the summer.

Buying in the winter can help to save you some cold nights and an outrageous bill to fix the heater or flaws in the insulation.

In addition, when selling a house in the summer, your buyer may require more expensive tests to investigate how “winterized” the house may be. This addition in the inspection could end up costing you money, even if the house is insulated and ready for the long winter ahead. When you sell your home in the winter, the buyer will be able to see for themselves just how well the home can handle the harsher weather, and may spare you the extra steps and negotiations in the inspection.

Year-End Bonuses and Taxes

Many find the end of the year, or tax season, to be the best time financially for them to purchase or sell real estate. Many people receive year-end bonuses or are eligible for tax incentives. This money can help with the many financial factors involved in buying a home, from the down payment to any renovations needed before or upon moving into a new home.

This money can also benefit the seller who may be facing real-estate fees, closing costs, or a down payment on a new home.

Start Fresh When Spring Hits

A house is rarely exactly how you want it when you first move in. When you move in during the winter months, it allows you to start fresh in the beginning of spring with landscaping and other yard work and renovations rather than spending your whole summer on these projects. This allows you to have more time to enjoy your new home and yard before the winter returns.

If you are looking to sell your home in the winter, you can benefit from the flip side of this. You will not have to worry about spending money to landscape the home to increase curb appeal for the sale. Most people looking in the wintertime will be looking more at the home itself rather than the money spent on landscaping and foliage.

Buying or selling real estate, no matter the season, is a big decision and can be huge investment for the future. If you are looking to buy or sell real estate but want to ensure that you are getting the fairest deal you can, hire an attorney to review the contract, assist with negotiations, and guide you throughout the process.

Contact Us today, and let us help you with your home-buying process.