New York · Chapter 24 of 26

Income Tax Issues in Real Estate Transactions

Federal income tax rules a licensee should understand: homeowner deductions, IRA withdrawals for a first home, capital gains, the $250,000/$500,000 home sale exclusion, basis and adjusted basis, depreciation and recapture, active/passive/portfolio income, Section 1031 like-kind exchanges, and rules on interest, points and refinancing.

35-minute read · Built for the Salesperson Exam

Taxpayer Relief Act of 1997mortgage interest deduction ($750,000 limit)property tax (SALT) deductionIRA first-time homebuyer ($10,000)short-term vs. long-term capital gainSection 121 ($250,000/$500,000; 2 of 5 years)basis and adjusted basisamount realizeddepreciation 27.5 / 39 yearsdepreciation recapture (25%)active, passive and portfolio incomeSection 1031 exchange45-day identification / 180-day closingqualified intermediarybootleaseholds of 30+ yearsreverse exchangepointslow-income housing tax credit

Tax Benefits of Owning a Principal Residence

Homeowners who itemize can deduct qualified mortgage interest and state and local property taxes. Mortgage interest is deductible on acquisition debt (debt used to buy, build or substantially improve a principal or second residence) of up to $750,000 ($375,000 married filing separately) for loans taken out after December 15, 2017, and up to $1,000,000 on older loans. The 2017 law capped the combined deduction for state and local taxes, including property taxes, at $10,000; legislation enacted in 2025 raised the cap to $40,000 for 2025, with small annual increases through 2029 and a phase-down for high-income taxpayers, before it reverts to $10,000. Many taxpayers take the standard deduction instead of itemizing, so the value of these deductions depends on the individual's situation, and licensees should refer clients to a tax professional.

26 U.S.C. §§163(h), 164(b)(6)

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