Mortgage Lending Tax Impacts

A tax-deferred exchange for properties used for investment or business purposes is also referred to as the like-kind or

1031 exchange

Bob just closed on his investment property. He's already identified a replacement property that he'll be exchanging into by using a 1031 tax-deferred exchange. How many days does he have to close on his replacement property?

180

An investor must complete the 1031 exchange by the earlier of either midnight of the _____________ following the close of the relinquished property, or the due date of the investor's federal income tax return for the tax year in which the relinquished property was sold, including any extensions.

180th calendar day

When exchanging more than one property, the combined fair market value of the properties can't be more than 200% of the value of the relinquished property.

200% rule

Leased property can also qualify for an exchange as long as the lease is for

30 years or more.

John wants to do a 1031 tax exchange with a property he just sold. How many calendar days does he have to identify a new property for the exchange?

45

An investor can exchange multiple properties as long as the properties total at least 95% of the value of the relinquished property.

95% rule

____________ sometimes offers an introductory interest rate that is lower than a fixed rate mortgage.

An ARM

What is the three-property rule as it relates to tax-deferred exchanges?

An investor can identify up to three replacement properties and not encounter a restriction regarding fair market value as long as debt load requirement is met.

John sells his single-family home and purchases a new home for his family to reside in. Marcus owns a single-family home, but rents it out to a co-worker while he is on an extended two-year military tour overseas. Donald sells an apartment complex and purchases a new complex in a different part of the city. Which of these consumers is most likely to take advantage of a 1031 tax-deferred exchange?

Donald

It's not clear from the form how much the new payments will be for the borrower.

False

The note is not necessary to convert the interest rate from fixed to ARM.

False

With each adjustment period in an ARM, the interest rate will rise.

False

Income-producing residential, commercial, and industrial property can qualify for an exchange.

Hotels and motels also can qualify.

Homeownership can have a number of benefits, but did you know there are also tax benefits to owning your primary residence? ________________ can be deducted from income taxes--and not just in the first year of the mortgage.

Interest and property taxes

Which of the following is a true statement about deducting interest on mortgages taken out in tax years between 2018 and 2025?

Interest on the first $750,000 of mortgage debt is deductible for married couples filing jointly or $375,000 for married couples filing separately.

What are the two primary types of deductions that a homeowner is permitted to take on their primary residence?

Mortgage interest Property taxes

Investors can defer capital gains using the 1031 exchange for real estate exchanges only.

Personal property, such as equipment, cannot be tax-deferred.

Which four of these activities are the responsibility of a qualified intermediary (QI)?

Place proceeds of the first sale with escrow, with instructions. Handle transactional paperwork with escrow. Provide transfer documents for the exchange. Submit a 1099 to the taxpayer and to the IRS for any gross proceeds paid out.

Homeowners can itemize this deduction on Schedule A for a primary residence and on Schedule E for a rental property.

Property Taxes

The deduction applies to any type of real property you own, including your personal residence, a vacation home, investment property, vacant land, time share, etc.

Property Taxes

The 45-day identification period includes

Saturdays and Sundays.

Implemented changes for mortgage interest deductions for those who are eligible for these deductions on their income tax returns. For homes purchased between 2018 through 2025, owners can deduct the interest paid on their loan, with certain restrictions.

The Tax Cuts and Jobs Act of 2017 (TCJA)

Bob opted for an adjustable rate mortgage, or an ARM when he first purchased his home a few years ago. When it came to the first adjustment period, Bob's rate changed from the fixed, introductory rate to an adjustable rate. Bob made a call to his lender to make sure he understood what was happening. Bob's lender reminded him of the fixed / adjustable rate note he completed as part of the original loan paperwork, which allowed his lender to change Bob's loan from a fixed rate to an adjustable rate for the remainder of his loan payments.

The fixed/adjustable rate note is part of the original ARM loan documentation and is notification of the change from the fixed introductory rate to the adjustable rate structure that will be in place for the life of the loan.

When would an investor who is involved in a 1031 exchange consider entering into a 1031 reverse exchange?

The investor closes on the replacement property before selling the original property.

In a 1031 exchange, there are rules governed by Section 1031 of the Internal Revenue Code. The rules include ______

The property in an exchange must be like-kind.

An investor can identify up to three replacement properties with no fair market value restriction, provided they meet the debt load requirement.

Three-property rule

An ARM sometimes offers an interest rate that is lower than a fixed-rate mortgage for a period of time

True

It's possible for an adjustment period to have many possible ranges, such as three or 10 years apart.

True

The lender will specify on the form how much the fixed interest rate will be.

True

The note converts the interest rate in an ARM from fixed to adjustable.

True

Home Acquisition Financing _____________, married homeowners who purchase property in years 2018 through 2025 and file jointly may deduct interest on up to $750,000 in housing debt, whereas those who file separately may deduct interest on up to $375,000 in debt.

Under TCJA

The fixed/adjustable rate note spells out the details of the conversion from

a fixed rate to an adjustable rate, including the new interest rate and the new payment amount.

An investor can revoke and submit a new property for exchange as long as _______________ within the 45-day identification period.

a formal identification is made to the qualified intermediary

The 1031 tax exchange is used to defer paying taxes when there is _______________ of what's called a "like-kind" property.

an almost immediate repurchase

Any cash an investor receives from the proceeds of a sale is called __________ and it is taxable

boot

A reverse exchange is an option for an investor who has not sold the original property that is part of the 1031 exchange,

but who has already purchased the replacement property to try to sell another property instead of the original property.

Home Acquisition Financing Interest can be deducted from a mortgage used to ______________ a main home or even a second home, with the loan amount secured by the property itself

buy, build, or improve

What is it that an investor receives from sale proceeds is called "boot" and is taxable.

cash

Incoming-producing residential, commercial, and industrial properties, as well as hotels and motels, can qualify for an

exchange

A tax-deferred exchange for properties used for ____________________ is also referred to as a "like-kind" or 1031 exchange.

investment or business purposes

A 1031 exchange can only be applied to a property that has been bought and sold for

investment or business purposes.

When an ARM adjusts _________________

it can go up or down

The 45-day deadline to identify a __________ property in a tax-deferred exchange includes weekends.

like-kind

For properties purchased in years 2018-2025,

married homeowners who file jointly may deduct interest on up to $750,000 in debt, whereas married homeowners who file separately may deduct interest on up to $375,000 in debt.

The two primary deductions homeowners are permitted to take are ___________________

mortgage interest and property taxes

Two primary income tax deductions for homeownership are

mortgage interest and property taxes.

The Fixed/adjustable rate __________ is used to convert a fixed rate of interest to an adjustable rate.

note

The 1031 tax exchange is used to defer paying taxes when there is an almost immediate repurchase

of what's called a "like-kind" property.

Home Acquisition Financing The loan associated with this type of deduction must _____________________ of the property.

only be for the purchase and improvement

The 180-calendar-day deadline to close on a _______________ in a tax-deferred exchange is absolute.

subsequent property

If an investor fails to identify a property within 45 days, or if the deal falls through and the investor isn't able to identify a new property within the 45-day window,

the investor's chance to complete a 1031 exchange for that property is over.