One of the most common myths about bankruptcy is that you are required to give away all of your belongings. In reality, there are certain exemptions and items that you are allowed to keep during bankruptcy. For example, Michigan has a distinct group of items that a person is allowed to keep while navigating the bankruptcy process. To determine what items you are allowed to keep when filing for bankruptcy as well as answer the many questions that arise about the bankruptcy process, many people find it helpful to obtain the assistance of a seasoned bankruptcy lawyer. It is also helpful to understand some of the basics about Michigan’s homestead exemption.

The Amount Allowed Under Michigan’s Homestead Exemption

In accordance with the Michigan exemption law, homeowners as well as dependents are allowed to exempt up to $38,225 of interest in property. In cases in which the homeowner is 65 years of age or older (or the homeowner is disabled), the amount is increased to $57,350. While some states recognize that couples who file for bankruptcy and own property together are able to use the full exemption amount, married couples in Michigan who own property together are unable to double the homestead exemption. Despite these limitations, since 2005, the Michigan Department of Treasury has adjusted the exemption amount every few years. Currently, these amounts are scheduled to be adjusted against in 2020. This homestead exemption will apply to various types of real property that you might own in Michigan including houses, condominiums, co-op units, mobile homes, water vehicles, or any other type of home you own and use as your principal residence. If the property has associated land, the homestead exemptions also includes 40 acres. If the property is located in a city, the exemption includes one lot.

The Option of Federal Bankruptcy Exemptions

In the state of Michigan, when you declare bankruptcy, you have the option to select either state or federal bankruptcy exemptions. Currently, the federal bankruptcy exemption is $23,750.  Much like Michigan’s bankruptcy exemption, this federal exemption can be used for houses, condominiums, co-op units, mobile homes, water vehicles, or any other type of home. Unlike Michigan’s exemption, under the federal exemption, married couples are able to double this exemption. Much like Michigan’s exemption numbers, though, these numbers change frequently, which is why it is often important to contact a knowledgeable bankruptcy attorney before proceeding through the bankruptcy process.

Contact an Experienced Bankruptcy Attorney

The bankruptcy process is particularly complex and if you are not familiar with bankruptcy laws in Michigan, it is often in your best interest to obtain the assistance of a skilled bankruptcy attorney. At Resnick Law, we have years of experience in helping individuals navigate the bankruptcy process. Contact our law office today to schedule an initial free consultation.

(image courtesy of Joss Woodhead)

Net Operating Losses

For many investors, buying income-generating real estate isn’t too different from buying corporate bonds or stocks. But there is one major advantage: losses on rental properties can be deducted from taxable income.

Getting that provision into the tax code was a rocky road. In 1986, Congress passed a law that treated virtually all investments in rental real estate properties as passive investments (much like stocks or bonds).

This meant property owners could no longer deduct any operating losses on their properties from their taxable income. In the following years, property prices went into a tailspin. Legislators blamed the 1986 law in part for causing the Savings & Loan crisis by discouraging investment in real estate, according to a 1994 Chicago Tribune report. So they changed the rules again.

Since 1993, rental property owners can deduct operating losses on their properties from their taxable income, provided they spend at least half their working hours and at least 750 hours a year as a “real estate professional.”

Other Mechanisms of Tax Reduction

Depreciation is the most famous — and counterintuitive — way real estate investors can shrink their tax bill. The IRS treats real properties as assets that lose value over time, along with cars, desks and refrigerators.

Property owners can deduct a certain portion of a property’s value every year until that value reaches zero. For residential rental properties, the typical depreciation period is 27.5 years, according to the IRS website.

As useful as depreciation is to property owners, it is a gradual process and rarely generates a sudden sizeable loss.

Another way developers can lower their tax exposure is through cancellation of debt, or outstanding debt that has been forgiven after negotiations. Typically, this kind of debt forgiveness is treated as income on a tax bill, but current laws allow taxpayers to deduct this debt if it is tied to Chapter 11 bankruptcy or if the taxpayer is insolvent — meaning their debt is greater than the total market value of all assets

Developers have long used these strategies. After a recent article in The New York Times about Donald Trumps reported losses — $915,729,293 — on his tax forms in 1995, tax services firms sought to seize the moment by sending out email blasts advertising their tax reduction services.

One email from South Florida-based Property Tax Appeal Group, titled “Donald Trump Knows How to Avoid Taxes in Real Estate,” urged investors to file property tax appeals and “take advantage of what the law allows.”

“This is truly a win-win situation,” the email read.