Real Estate Owners Should Plan Now Before Tax Breaks Expire

Posted by Nick Niesen on November 8th, 2010

Few can say that the U.S. income tax code is easy to navigate. To complicate matters further, taxpayers need to plan ahead to take advantage of recently enacted tax breaks that are scheduled to sunset at some point between now and December 31, 2010.

Below are some of the current tax savings opportunities set to expire soon, starting with those scheduled to expire at the end of 2007.

Energy Efficient Expenditures: Last year's Tax Act provides incentives for people who make energy efficient improvements to their homes or commercial buildings. Plus, manufacturers of energy efficient appliances get a tax credit for each unit produced, so consumers should ensure that this tax break is passed along to them with each qualifying purchase made. Most of these energy efficient tax breaks end on December 31, 2007.

$2,000 Credit for Contractors: During 2006 and 2007, homeowners who purchase a newly constructed energy efficient home, or have their home substantially rehabbed to become more energy efficient, need to be aware that the contractor is eligible for a $2,000 tax credit from the IRS.

Increased Section 179 Deduction: Through the end of 2007, taxpayers can elect to write-off the first $108,000 (in 2006, up from $105,000 in 2005) of equipment purchased each year, instead of depreciating the cost of that equipment over its useful life of 5 or 7 years. Starting in 2008, the Section 179 deduction will once again be limited to just $25,000 per year. Anyone purchasing a business or adding equipment to an existing business should consider doing so before December 31, 2007, to allow for a much larger upfront tax deduction.

Here are a few tax breaks scheduled to expire in 2008 that will impact the capital gains tax rate.

Reduced Tax Rate on Capital Gains: Currently, the maximum tax rate on long-term capital gains (assets held for more than one year before being sold) is 15 percent. Effective January 1, 2009, the capital gains tax rate is scheduled to jump by one-third to 20 percent. Investors who plan to sell any of their real estate or investments at some point this decade should consider selling appreciated assets on or before December 31, 2008 to lock in the lower tax rate. Congress is trying to extend this provision through 2010.

Zero Percent Capital Gains Tax Rate: The 2003 Tax Act provides for a zero percent capital gains tax rate during 2008 only for people in the lowest tax bracket. Individuals should consider gifting appreciated property to their children or grandchildren who will be 14 or older that year, and have them sell those investments. Provided the child realizes capital gains of about $30k, no tax will be owed on that gain (assuming the child has no other income). Parents hoping for financial aid for that child need to consider how this strategy might impact that child's potential college financial aid package.

Most everything else expires in 2010

The biggest tax planning challenge is what to do after 2010. On December 31, 2010, the 2001 Tax Act is scheduled to sunset, with the bulk of the tax rules returning to the pre-2001 rules. This means that the marriage penalty, stealth tax, and reduced retirement and education savings limits will return. How Congress and the President elected in 2008 will deal with the U.S. income tax code as the provisions of the 2001 Tax Act sunset is anyone's guess.

Plan Ahead

Tax planning one year at a time used to do the trick. In 2006, with major tax breaks expiring in three out of the next four years, tax planning is now a five year proposition. It's best to start doing it today, and project out a few years, keeping these tax dates in consideration.

Good luck,