Tax Returns, Real Estate, Refunds and Rip-Offs

A big part of every real estate transaction involves taxes: You pay transfer taxes when you buy, property taxes when you own and more transfer taxes when you sell. There are also taxes on income earned from investment real estate and even capital gains taxes, though infrequently for the sale of residential property.

Not surprisingly, real estate taxes are a big part of local budgets. New York City, as one example, finds that it now has a $3.9 billion surplus. Why? In big part because times have been good on Wall Street, big bonuses have been paid out, lots of people bought condos and co-ops, and the city taxed every property transaction it could find.

The good news is that while real estate is taxed, there are also big real estate write offs — mortgage interest is usually deductible, property taxes are deductible, depreciation is deductible for investors, when property have been owned for at least a year long-term and lower capital gains rates apply and if you you’ve sold a property that you used for two of the past five years you may be able to deduct up to $500,000 in profits if married and up to $250,000 if single.

So far, not a bad deal.

But there is a part of the taxation process which is a bad deal. Let me explain:

It’s an amazing thing that huge amounts of time are spent keeping books, trying to figure out what the tax rules say and preparing returns. And then — having gone through this lengthy, complex process in an effort to get the accounting right — millions of taxpayers proceed to give away a huge part of their refunds.

How is this done? Some tax preparers helpfully assist taxpayers — especially low- and moderate-income taxpayers — by preparing returns. When a refund is due the commercial service then offers a cash advance or what is cleverly known as a “refund anticipation loan” or RAL. Since most of us would like to get our money today rather than waiting for an IRS check, a RAL sure seems enticing.

Such advances, of course, are merely short-term loans. And what is the cost for such convenience? According to a study by the National Consumer Law Center and the Consumer Federation of America, “12.38 million American taxpayers spent an unnecessary $1.6 billion in 2004.”

But wait a minute. The government is not known for being especially fast, especially when it comes to returning money. Don’t taxpayers save months by using a RAL?

Well, actually, no. According to NCLC and CFA, taxpayers using RALs were able to “obtain their refund monies faster by two weeks or less than if they used electronic filing and direct deposit.”

Let’s be fair. Two whole weeks, as many as entire 14 days and just as many nights, can be important when the rent is due or someone really needs money for an important purpose. Recognizing this, surely our friends in the tax preparation business go easy on RAL rates and charges. Right?

“The effective annual interest rate (APR) for a RAL can range from about 40 percent (for a loan of $9,999) to over 700 percent (for a loan of $200). If administrative fees are charged and included in the calculation, RALs cost about 70 percent to over 1,800 percent APR,” say NCLC and CFA.

Who uses RAL loans? A CFA survey found that “the national survey found that RAL users are vulnerable to quick cash loan offers. RAL users are more likely than non-RAL users to be less well educated, work in service or semi-skilled/unskilled jobs, rent instead of own their homes, be female and African American. RAL users are also heavier users than non-RAL users of other high cost fringe financial services, such as rent-to-own, payday loans and pawnshop loans. These consumers are more likely to be unbanked than non-RAL users and those who do have bank accounts are more likely to have overdrawn in the past year.”

This is a case where the government — and particularly the IRS — have the right idea.

Don’t be a sucker. Check out the benefits of the earned income tax credit (EITC). See if you can file electronically. See if local community groups can provide tax preparation assistance. If your adjusted gross income is less than $52,000 look at the Free File program from the IRS for a speedy refund. And plan ahead so you need not rely on RAL loans and the obscene costs they represent.

“We don’t like these RALs, the loans that are given out and are being advertised this time of year,” IRS Commissioner Mark W. Everson said last week.

As Everson explains, if you use the “Free File” system set up by the IRS instead of a paper return you’ll likely get a refund in half the time.

Published originally by Realty Times on February 6, 2007 and posted with permission.

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