3 Ways the Alternative Minimum Tax Affects Real Estate

The Alternative Minimum Tax is basically a parallel tax system that runs in conjunction with the regular tax system. You may not have heard of it before now because it was originally only directed at individuals with extremely high incomes. However, since it was never indexed to inflation it will be affecting the middle class as of this year.

The regular tax system currently encourages home ownership by allowing deduction on mortgage interest, property taxes, home equity interest and not recognizing gain on the sale of a primary residence, up to $500,000 for a married couple and $250,000 for an individual.

The regular tax system also promotes real estate investing by allowing depreciation to be taken on a straight-line basis over a 27.5 year recovery period for residential income property and a 39 year recovery for commercial property.

The AMT as it currently stands, does away with a lot of these incentives to owning a home or investing in real estate.

  1. It does not allow deductions for real estate property taxes.
  2. It delays depreciation on real estate by increasing the recovery period to 40 years.
  3. Does not allow deductions on home equity lines of credit used for anything other than to improve the home.