Tax rules for clients turning a house into a rental property: Tax Strategy Scan


Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

How to handle tricky tax rules when you convert your house into a rental property
Clients interested in converting their house into a rental property should expect complicated tax consequences of their decision, an expert writes in MarketWatch. For example, the tax basis would change when they compute depreciation, loss or gain for sale purposes, according to the expert. And, the expert notes, clients cannot claim a tax loss when they sell a personal residence for less than tax basis. “The special basis rule used for tax loss purposes is different than the normal basis rule used for tax gain purposes, you can easily wind up selling the converted property for a price that results in neither a tax loss nor a tax gain.”

Mortgage interest tax deductions cost the federal government $68.2 billion in 2012, according to an expert.

Cole Burston/Bloomberg News

37 states that don’t tax Social Security
Social Security benefits are not subject to state income taxes in 37 states, according to this article in Motley Fool. However, clients may still owe federal income taxes on a portion of their benefits if their combined income exceeds a certain threshold. While relocating to a more tax-friendly state can be a smart move to reduce the tax bite, seniors should also consider the impact of this decision on their overall cost of living.

How to help clients escape a lousy HSA
Clients who feel trapped by their employer-provided HSA have the option of saving in another account, writes Morningstar’s Christine Benz. “Going outside of the captive HSA does not require one to forgo HSA payroll deductions — and the tax breaks that come along with them,” Benz says. “Instead, it’s possible to use an employer-provided HSA to take advantage of automatic payroll deductions, then periodically transfer the money to an HSA of one’s choice.”

What happens if clients don’t pay their taxes?
Taxpayers who fail to settle their tax dues by the April 15 deadline incur a debt that will continue to grow, according to this article in U.S. News & World Report. Not paying taxes on time will also affect their credit worthiness and make their financial life uncomfortable. This would also be costly, as they will have to spend extra money and time. Clients who cannot pay their tax bill on time should still file their returns and negotiate with the IRS on how to pay their tax liability.

Tax ramifications of owning an investment property
Clients are advised to determine the tax consequences before buying their first rental property, according to this article in Bankrate. For example, owning a rental property will qualify them for certain tax breaks, such as tax deductions for rental income losses, property taxes and other related expenses. However, they will owe capital gains taxes on the sale of an investment property. The rates will vary depending on how long they own the rental property prior to the sale.


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