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
has 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 |
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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.
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