Terry Smith - The Tax Pro

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Real Estate Taxes & Short Sales

Prepaying property taxes and state income taxes can save you in the long run.

Pay state and local tax installments before December 31st. This will increase the deduction for state and local taxes on your 2010 Federal income tax return. California only counts payments made in the calendar year for 100% credit.

The prepayment usually makes sense if you expect to be in the same, or lower, tax bracket next year. Don’t prepay if you expect to be hit with the AMT, as state and local taxes are not deductible for AMT purposes.

Even if you use the IRS tax tables, you can add certain big ticket items to your sales tax table write off (cars, boats and planes). You can deduct all the actual sales tax you paid, not just the big ticket items, but you need receipts for both claims.

Short Sales

Short Sales go from one extreme to the other. Normally the quick answer to “what do you think about a short sale?” is “It’s tax suicide”.

For a homeowner that is being forced to sell their principal residence the simple math (and there is no simple math when dealing with the IRS) is the 1099 form you are supposed to get in January of the next year is what has been “forgiven” and that is all taxable. With documentation we can quite often substantially reduce that number, or if we are lucky and you have never borrowed from your equity to pay bills, just upgrades for your principal residence, then we can get out of the this income as being taxable.

The other extreme is that it is for a rental (investment property) that is “in the hole” already and yes you may owe $500,000 on the note, and they can only sell it for $350,000, so on paper you have been “forgiven” $150,000 and that is all taxable. However, when we enter all the other math of the rental activity, and it is now a 100% disposition of that asset, now we can use past unallowed expenses and just quite often “wipe out” the tax bill.

It is not a simple process, but when you are looking at having an “extra” $150,000-$200,000 added to your gross income (that you didn’t really receive), then we need to take the time to document all the expenses (prior years and current year) and “audit proof” your return while zeroing out your tax bill.