Tax tricks of the real estate rich

By Matt Woolsey

updated 1:58 p.m. ET March 27, 2007

Using real estate to lower taxes doesn't require an army of CPAs or numbered bank accounts — just the craft to cut through the tax code.

"There's a reason why the rich are rich," says Sandy Botkin, chief executive of the Washington, D.C.-based Tax Reduction Institute. "In real estate, people are missing things they shouldn't be missing, and it's costing them a fortune."

Some of the more sophisticated tricks require a keen eye for predicting future home and neighborhood values and the willingness to buy significant fixer-uppers.

But for the most part, real estate tax planning is straightforward. And the payoffs are huge, especially if you do like the wealthy.

In a real estate transaction, you can end up paying thousands of dollars in title insurance, attorney fees, appraisal fees, pest inspections and bank fees, none of which are deductible.

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Points paid, however, are. A point is equal to 1 percent of the loan amount and is paid to a lender to lower the interest rate. For tax deduction purposes, points are amortized over the life of a loan.

At purchase, negotiating with a bank to absorb fees — in exchange for paying an extra point or two — means the same cash flow for the bank and makes more of your cash outflow deductible because you're paying points, not fees. A few years down the line, homeowners are confronted with the problem that refinancing isn't immediately deductible. But, since most people sell before the full length of their loan, unamortized points at sale or refinance become deductible.

Aggressively challenging valuations, which determine property taxes, is another tactic.

"Many communities have been revaluing properties upwards during the housing price run-up since 2001," says Anthony Sanders, real estate chair of finance at The Ohio State University. "Tax assessors have often raised the value of the house to a higher amount than the actual current value of the property."

That discrepancy can cost serious tax dollars, especially during the current slowdown in home sales price growth. To combat this issue, experts advise hiring independent appraisers and aggressively challenging city estimates of property value. While success rates vary by area, if you can effectively demonstrate property worth against like-kind home sales, it is possible to lower your tax basis.

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