Wednesday, October 19, 2016

Property Types Per IRS.

How does the IRS rank your Property?


Types of property.png
There are four types of property recognized by the Internal Revenue Service.
A principal residence is the place you live or expect to return.  You may only have one principal residence at a time.  The confusion comes because a taxpayer can deduct the interest and property taxes on two homes on the Schedule A of their tax return.  Only one of the homes is the principal residence and the other is a second home which is technically, investment property.

Rental property, also known as section 1231 property, is used for income purposes.  It includes homes, condos, apartments, shopping centers, office buildings, warehouses and any improved property which generates rental income.  Only rental property can be depreciated.  Income tax on the gain may be deferred through the use of qualified exchanges.  When gain is recognized, favorable long-term capital gains rates are available on any property owned for more than 12 months.

Vacation property is rental property that is used for personal purposes less than 14 days a year or 10% of the total time it is rented.

Investment property is real estate primarily held for an increase in value.  It can be improved property or vacant land.  Income tax on the gain may be deferred through the use of qualified exchanges.  When gain is recognized, favorable long-term capital gains rates are available on any property owned for more than 12 months.

Dealer property is primarily inventory and does not enjoy the benefits of exchanges and any income is taxed at ordinary income rates.  Examples would be builder's homes whether spec or custom; a home that someone purchases for immediate resale regardless of whether improvements are made