Deductible Expenses For Real Estate Agents

A real estate agent filling out their deductions with a calculator next to their hand and with tax season in blue font


As yet another tax season rolls around, and people everywhere are scrambling to save as much money as possible by maximizing their deductions. This can be a real headache if you’re in real estate, since it’s a complex line of work with a wide array of different expenses, some of which are deductible and some of which are not. Which items you can and cannot write off depends on many factors, including the size of your business, your office, your vehicle, and other things. Here are a few of the most popular legal deductions for real estate agents:

Your Home Office

If you work from home, you might be eligible to deduct the cost of a home office. As long as you have an area of your home specifically dedicated to work, you should be able to subtract its cost from your yearly taxes. This applies even if you also make use of your broker’s office space. There are several rules, however; to deduct the cost of a space, for example, it must be your primary workspace and it must not be used for other things. You can’t deduct your bedroom just because you have a computer there that you occasionally use for work; you would have to use the computer solely for your real estate job and you would only be able to deduct the cost of the square footage of the area you are employing.

Your Vehicle Mileage

Of course, you will be expected to travel quite a bit as a real estate agent, especially during your busiest times. The more work you are getting, the more you’ll have to drive, and the cost of gas and wear and tear on your car can really rack up. Fortunately, if you keep a detailed log of your mileage, you will be able to deduct the travel that you do for work. The IRS has a standard rate for miles traveled; it could potentially add up to quite a bit if you’re traveling a lot for work. Keeping track of your mileage is no longer the slog that it once was, either; you can simply use an app on your phone to maintain a detailed record of everywhere you went for work. It’s potentially also possible to deduct the cost of leasing a car, or even to deduct the depreciation of a new car; both of these are viable options, as a successful real estate agent shouldn’t be seen driving around in a clunker!

Other Travel Expenses

Occasionally, you will have to travel for work for meetings, seminars, and other crucial business ventures. In most cases, you can deduct the cost of travelling, including hotel fees, airline tickets, and other sundry costs. Meals such as business lunches are 50 percent deductible too, so make sure you keep a detailed record anytime you take a client to a restaurant or cater an open house.

Your Office Supplies

Most of what you use in your office can be deducted as well. This ranges from little things that add up over time – such as stationary and photocopies – to larger expenses such as furniture. If you purchase a new desk, for example, you may be able to deduct the full amount. If you made such a purchase a few years ago, you might still be able to deduct the cost, minus a few years of depreciation. If you use your cell phone for work, you can deduct a certain amount of your payments as well. Or you may have a work phone that you use only for business; in that case, you can deduct the full amount (this also applies to a landline to your office).

Your Realtor’s License

As a real estate agent, you have certain fees that you must pay annually, many of which are deductible. For example, you can deduct the cost of renewing your state license each year; you can also deduct the cost of your business insurance and your Errors and Omissions insurance. There are other potentially deductible costs as well, such as membership dues, and certain other real estate taxes. Self-employment taxes, however, are not deductible.

Retirement Plan Contributions

Of course, just as anyone in any line of work should, a real estate agent should make regular contributions to a retirement plan. Often, you can make deductions based on how much you are contributing to a retirement plan; for example, the limit for a standard IRA is 12.5%.


Delaware Statutory Trusts Increasingly Popular as Real Estate Investment Opportunities

DST Trust Investment Real Estate Property
Delaware Statutory Trusts

There is a number of ways to hold title to real property. Perhaps the most common way is to hold full title – or “fee” simple title – as an individual or married couple. Title to real property can also be held jointly by multiple corporate or individual persons. One increasingly common means to jointly hold title to an investment property is to use a so-called Delaware Statutory Trust. DSTs are trusts which have been established under the state laws of Delaware and which permit multiple investors to co-own a property and still maintain the ability to freely sell their ownership interest. In a DST ownership arrangement, investors acquire an “undivided fractional interest” in the real property and they are able to dispose of this interest without obtaining the prior approval or cooperation from the other investors. In other words, DST interests are freely alienable, and for this and several other reasons DSTs have become used more and more frequently in tax deferred real estate exchanges under IRC Section 1031.

Benefits of DSTs

Delaware statutory trusts offer several significant benefits over other co-ownership arrangements. For one, DSTs are able to accommodate large numbers of investors – much larger than TIC arrangements – and so DSTs provide a reasonable avenue for investors to acquire interests in highly expensive developments. Investors can achieve a level of diversification with DSTs which would ordinarily be unattainable; with DSTs, investors can obtain reasonably priced fractional interests in properties which would normally be outside their list of prospects.

Investors who prefer passive investments may also gravitate to DSTs. Typically, DSTs are managed by a central sponsor, and so investors usually take on very few (if any) managerial responsibilities when they acquire an interest in a DST.

Potential Issues

Because of their structure, DSTs are likely to be an excellent option for veteran investors who want steady, reliable returns from investment property with relatively low risk; they will be less ideal for newer investors, or for investors who are looking to grow their wealth at a rapid pace.

Obtaining an interest in a DST is a bit tougher than doing the same with another investment vehicle; DSTs have barriers to entry, and so investors who acquire DSTs typically hold these interests longer than they hold interests in other investments. This means that investors should think carefully about whether investing in a DST be a good decision for them, because DSTs generally demand greater levels of commitment from investors.

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Combining Sections 121 & 1031 for Optimal Tax Treatment

Real Estate Residence Tax Capital Gain Investment
Sections 121 & 1031

As we’ve noted before on HTW, Section 1031 of the IRC applies specifically and exclusively to real property used for business or investment purposes. Section 121, on the other hand, applies to primary residences, and can be utilized to eliminate substantial capital gain upon the sale of one’s property (up to $250,000 for single filers and $500,000 for married filing jointly). Though no taxpayer can use 1031 to exchange his primary residence, the tax code allows taxpayers to simultaneously utilize both of these sections in cases involving mixed use or dual use properties. In the 1031 industry, combining Section 121 and Section 1031 in this manner is commonly referred to as “split treatment.” In this article, we will discuss how this process of combining 121 and 1031 can be achieved.

Combining on the Sale

If a taxpayer has been living in a portion of the property he or she wishes to sell as part of a like-kind 1031 exchange, then the taxpayer may utilize 121 and 1031 on the sale. Suppose that the taxpayer owns a four-unit rental property and lives in one of the units; in this scenario, the taxpayer could sell the property, exclude up to 25 percent of the gain through the exclusion conferred by Section 121 and then defer recognition of up to 75 percent of the remaining gain by acquiring suitable replacement property as part of a 1031 exchange. Hence, in this example, the taxpayer would only be deferring whatever portion of the property is considered used for investment purposes.

Combining after a Conversion

Suppose a taxpayer acquires like-kind replacement property as part of an exchange but then wishes to convert the replacement property into a primary residence. Then, let’s further suppose that the taxpayer wished to sell the property outright after this conversion to a primary residence. In this scenario, the taxpayer would have benefitted initially from Section 1031 on the acquisition, but they would also be able to utilize Section 121 to exclude realized gain on the sale. Current regulations on converted property state that a taxpayer must own a property for a minimum of 5 years after completing a 1031 exchange in order to be eligible to use Section 121; what’s more, taxpayers must also live in the property as their primary residence for at least 2 years during that 5 year period.

Let’s illustrate this: suppose that a taxpayer exchanges into an investment property through a 1031 exchange and then moves into the property 2 years later. Suppose that the taxpayer lives in the property for 3 years and then decide to sell the property. The taxpayer could use Section 121 to potentially exclude up to $250,000 (if filing single), but he would only be able to exclude 3/5 of whatever gain is recognized on the sale. Even though the property would be classifiable as a “primary residence” at the time of sale, Section 121 could only offset a portion of the gain equal to the percentage of time spent living in the property.

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Top Areas for Future Home Buyers in the Greater Seattle Region

Seattle Real Estate Property Value Market
Seattle Real Estate Market

Though many of our clients are homeowners, quite a few of our clients are currently in the market (or plan to be in the market) for a new home. For this reason, in our present article we’d like to take a moment to highlight some of the hottest areas for real estate purchases in the greater Seattle metropolitan region. These areas offer plenty of perks to residents: pleasant scenery, easy access to downtown, safety, economic opportunities and many other benefits. If you are hoping to buy a house, condo or townhome in the near future, you should give serious consideration to a place in one of these areas.

And once you count yourself among the crowd of homeowners, be sure to keep coming back to HTC as we’ll be able to assist you with all of the tax-related issues homeownership can bring up.

Downtown Bothell

Though the economic recession of 2008-2009 slowed Bothell’s growth a bit, the city has managed to bounce back very well and has seen substantial development in the most recent few years. Multiple residential and commercial properties have been added to the city and more projects are on the horizon. The city boasts several important biotech and high-tech employers and also hosts the Bothell campus of the University of Washington. The median home value currently stands at $427,900 and the expected rate of appreciation is 5.2 percent.


Conveniently located very close to the University of Washington’s main campus and Seattle Children’s Hospital, the small town of Ravenna is an excellent choice for someone looking to acquire a stylish property in an urban setting. The town is receiving a large influx of tech professionals from California and elsewhere who are attracted to the stylish craftsmanship which characterizes Ravenna homes. Well-paid UW personnel and medical professionals are also flocking to the town given its location and pleasant community. The median home value is approximately $666,900 and the rate of appreciation is 7.1 percent.


Frequently regarded as Bellevue’s little cousin, the city of Kirkland is an easy choice for the most desirable real estate markets in the greater Seattle area. Between 2015 and 2016 the city saw a rise in home values of 11.7 percent and, though the exact rate will fluctuate, more good appreciation appears to be in store. Given its waterfront location and easy access to downtown Bellevue, Kirkland will likely continue to attract ambitious and affluent home seekers throughout the coming years. Kirkland Urban – the massive, mixed-use residential and commercial property which will host a movie theater, restaurants, bars, etc. – has an expected completion date of November, 2018 and play a considerable role in increasing Kirkland’s desirability.


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Investment Property & the Personal Residence Exclusion

Vacation Home House Property Investment
Investment Property

Contrary to what many may suppose, the initial purpose underlying the acquisition of a property does not necessarily bar future invocation of the principal residence exclusion (under IRS section 121). As we’ve discussed earlier, Section 121 of the Internal Revenue Code allows homeowners to exclude up to $250,000 ($500,000 for married couples filing jointly) of gain from the sale of a “principal residence” (as defined by the code). What we haven’t mentioned yet, however, is that property may be converted from its original purpose — say, for investment — into a primary dwelling specifically to take advantage of the principal residence exclusion. This is an extremely useful piece of information for many real estate owners. In many cases, a person will acquire real property as an investment — a vacation rental house, for example — and then later decide to use that same property as a personal residence. As long as the property is used as a “principal residence” — meaning that the owner has used the property as a residence for at least two years out of the most recent five-year period — the owner may utilize the exclusion provided by section 121.

Converting Your Investment (Rental) Property into a Principal Residence

Perhaps the most common instance of “converting” a property initially used for investment purposes into a property eligible for the exclusion provided by section 121 is the conversion of rental property. If they have access to the requisite funds, many real estate owners choose to invest in rental property in order to generate regular supplemental income. They may decide to acquire a vacation house and then rent this property out to tenants. It may become financially beneficial (or financially necessary) for the real estate owner to eventually convert this investment rental property into a primary dwelling at some point in the future; once the owner satisfies the time requirements of the provisions of section 121, they can then sell the property and exclude as much of the gain as the section allows.

Converting investment property into a primary dwelling for the purpose of invoking section 121 of the IRC is just one piece of expertise that the team at HTC is familiar with. As promised, we will return to the sixteenth amendment very soon, but before we do we thought it helpful to draw attention to this little gem of tax knowledge. Stay tuned for more gems in the future!

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If this article grabbed your attention, you should view our presentation on real estate tax advantages by our resident CPA Jessica Chisholm

The Basics of Tenancy-in-Common Ownership Arrangements

Real Estate Tenancy Common Ownership
Tenancy-in-Common Arrangements

Many of our clients are real estate owners and so in this installment of HTW we thought it beneficial to introduce the concept of tenancy-in-common ownership arrangements. A tenancy-in-common (TIC) is a form of joint ownership which involves multiple owners who share an undivided fractional interest in a single piece of real estate. This means that each owner possesses rights which are essentially identical to those of single owners rather than co-owners of typical partnerships. Being a co-owner in a tenancy-in-common arrangement confers numerous benefits; let’s discuss some of the basic characteristics of TICs and highlight a few of the distinguishing features of this type of arrangement.

Distinguishing Features

As mentioned, co-owners to a TIC possess undivided fractional interests in the underlying property. In practice, this means that they are not barred from freely transferring or alienating their interest in the TIC. At any time, a TIC co-owner can distribute their interest to another person without having to receive prior consent from the other co-owners. This distinguishes a TIC from other joint ownership arrangements, such as a tenancy-by-the-entirety.

Another distinguishing feature of TICs is the ability to have interests divided unequally among co-owners. Theoretically, in a TIC, one co-owner may possess a larger interest than other co-owners. In a scenario involving three co-owners, for instance, one co-owner may possess a fifty percent ownership and the two remaining co-owners may each possess an interest of twenty-five percent. This type of unequal division of ownership is either disallowed or typically not seen in alternative arrangements.

In a TIC, co-owners all share in the profits of the real estate and are all affected by changes in property value. Each co-owner receives a separate deed and insurance title to his or her interest in the real estate.

Another important feature of TICs is the ability of TIC co-owners to use their interest as part of a section 1031 exchange. As we’ve discussed several times, section 1031 allows capital gains tax to be deferred in the event that the proceeds from the sale of real property are reinvested in other real property of like-kind. Typically, section 1031 may not be invoked by traditional partnerships, but TICs are an important example of a jointly owned piece of real estate which may partake in a 1031 transaction.

In the near future, following a few more articles on the sixteenth amendment, we will discuss TICs in greater detail by exploring some legal cases involving TICs and section 1031 of the IRC.

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Essential Points of the Principal Residence Exclusion

Real Estate Property Capital Gains Exclusion Residence
Excluded Capital Gains

In our first essay on section 1031 we promised to explore other sections of the tax code – namely, 1033 and 121 – which may be of interest to our readers. As always with HTC, we are true to our word. In this essay we will discuss some of the basic facts of section 121.

Section 121 is referred to as the “principal residence exclusion” because it allows gains derived from the sale of one’s primary residence to be excluded from taxable income (up to certain limits). Under 121, real property owners are permitted to exclude up to $250,000 in capital gains from the sale of their principal residence; married couples intending to file jointly may exclude up to $500,000.

In order to qualify for section 121 treatment, property owners must prove that they have owned and lived in the property for at least 24 months during the last 60 month period. It is not necessary that these 24 months be consecutive. Hence, under current law, it is theoretically possible to utilize section 121 once every 2 years.

Real property owners who wish to take advantage of section 121 have to keep a close eye on the market trends which affect the value of their property. As we know, property values tend to fluctuate throughout the course of ownership, and if the value rises too high then the property owner may end up having a significant tax liability even after section 121 is invoked. If a property’s value rises too high, converting the residence into a rental property and then utilizing section 1031 after a certain period of time has passed may be an optimal strategy.

In later installments we will cover section 121 in greater detail by examining legal cases and viewing examples of how section 121 has been utilized in real-world scenarios.

*It is worth mentioning that section 121 is the successor to section 1034. Section 1034 allowed taxpayers to defer 100 percent of the capital gain derived from the sale of their primary residence provided that they subsequently acquired another residence of equal or greater value. This section was replaced with the provisions of section 121 in 1997.

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Tracing the Bounds of Section 1031 through Alderson v. Commissioner

Real Estate Property Exchange 1031 Tax
Real Estate

In our previous installment, we learned that whether a transaction falls under section 1031 of the Internal Revenue Code is an extremely important determination. Section 1031 enables taxpayers to receive non-recognition of capital gains when they exchange their real property for another property of like-kind. Real estate transactions can often result in gains of many thousands – and even millions – of dollars, and so receiving non-recognition of this sort under section 1031 can potentially remove very large tax liabilities. For this reason, the qualifications of section 1031 are narrowly construed by courts and so real property owners must carefully observe these qualifications to receive non-recognition treatment.

As with other areas of law, tax law is shaped by judicial opinions. Though the provisions of section 1031 originally emanate from the language of the tax code, the precise contours of these provisions are nonetheless informed and guided by the opinions issued in cases. This is the main reason Huddleston Tax Weekly has focused so heavily on highlighting tax, contract and property cases: it is important that our readers be aware not only of the various laws which may affect them, but also of how these laws apply in real-world scenarios.

The case of Alderson v. Commissioner (1963) gives us a sense of the level of conscientiousness required from the parties of a real estate exchange. As we will explore in detail below, Alderson shows that whether a cash payment is included as a contingency within an agreement is immaterial; the critical factor in determining 1031 treatment is whether an exchange of property of like-kind actually occurred. Alderson also demonstrates that property may be acquired specifically for the purpose of exchanging it as part of a 1031 transaction.


Alderson (the appellant) agreed to sell his property – referred to as Buena Park in the opinion – to a company known as Alloy Die Casting Company. Before the sale was concluded, Alderson decided he would prefer to exchange his property for another property which he discovered after the original agreement was made. This newly discovered property – Salinas – was then acquired by Alloy and transferred to Alderson in exchange for Buena Park.

The amended agreement between Alderson and Alloy included a contingency clause which stated that Alloy would pay cash for the Buena Park property in event that it could not furnish the Salinas property by a specific date.


To receive section 1031 treatment, a transaction must involve the exchange of properties which are of like-kind. The transaction must also be reciprocal and involve a present transfer of ownership, the transfer cannot occur gradually or incrementally over a period of time.


The court (U.S. Court of Appeals for the Ninth Circuit) overturned the opinion of the Tax Court and ruled in favor of Alderson. As noted above, the transaction between Alderson and Alloy was a bit convoluted and involved a formal amendment to the original agreement; two escrow accounts were created as a consequence of the decision made by Alderson to acquire the Salinas property. The Commissioner of Internal Revenue (the respondent) argued that the contingency clause provided evidence for the classification of the transaction as a sale rather than an exchange; the Commissioner also felt that the separate accounts provided evidence for this same conclusion. These arguments ultimately failed to persuade the court.

When determining whether a given transaction falls within the 1031 statute, the court considers the transaction as a whole and bases its decision on the true “substance” of the transaction. Though Alderson did initially agree to a cash sale, and the exchange was complicated by the opening of separate accounts, the substance of the transaction clearly reveals an intention to make an exchange of properties of like-kind. The court does not opine on hypothetical scenarios; the critical fact of Alderson was that the deeds for Buena Park and Salinas were exchanged, not that such an exchange may not have occurred if Salinas were not acquired.

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Property owners should view this video by Jessica Chisholm to learn more about the tax perks of homeownership

Property Law Terminology: Fee Simple & Fee Tail

English Property Law Real Estate
Property Law

As we have discussed before, American law descends from English law, and as a consequence many of our legal concepts and much of our legal language are borrowed directly from this source. This is perhaps most evident in our law of property. Much of our property law nomenclature derives straight from medieval English society. Today we will cover two terms which both take their origin from feudal England: fee simple and fee tail.

One of the overriding concerns of real property owners is the successful transmission of ownership to their property. To address this concern, our law of property has a variety of devices which are intended to assist property owners transmit their property in exactly the manner they wish it to be transmitted. Fee simple and fee tail are two such devices.

Fee Simple

A fee simple is an ownership interest which confers upon its holder full control over the future disposal of the land with which it is associated. Hence, an individual who has a fee simple not only has a present ownership interest but also may decide who acquires ownership interests in the future. A fee simple with no restrictions whatsoever is referred to as a fee simple absolute. A fee simple absolute confers an interest which is unlimited and may not revert back to the grantor under any circumstances.

It is possible for a grantor to place restrictions on a fee simple. One common reason for this would be to ensure that a piece of property is used for a specific purpose; another reason would be to prevent a grantee from engaging in a particular type of behavior. A restricted fee simple is referred to as being either a fee simple determinable or fee simple subject to a condition subsequent.

Historically, to create a fee simple absolute, the grantor needed to use particular language. This language was as follows: “To the grantee and his heirs.” These words needed to be present or else a smaller estate was transferred.

Fee Tail

In contrast to a fee simple, a fee tail necessarily restricts the ability of the grantee to transfer title of the land in the future. Traditionally, the underlying purpose of a fee tail was to prevent property from falling into the hands of persons who were not direct descendants of the original grantor. In other words, a fee tail was a mechanism created to maintain family wealth over successive generations.

To create a fee tail, the grantor had to use language such as the following: “To the grantee and the heirs of his body.” This language prevented the grantee from disposing of the land at will and automatically transferred ownership interest in the land to a direct descendant. Unlike a fee simple, therefore, a fee tail granted present possessory rights but did not allow the grantee to control the future direction of the land.

As mentioned earlier, these concepts are archaic and have roots which stretch back all the way to feudal England. However, it is still important to be aware of them as they contributed heavily to our modern law of property.

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Property owners looking to maximize their pocketbooks should take a moment to view this video on the tax benefits of property ownership

Murphy v. Financial Development Corporation: The Importance of Due Diligence

Mortgage Loan Due Diligence Lender
Mortgage Loan

No one who procures a mortgage loan ever wishes to fail to fulfill their financial obligation to the lending institution. However, it does happen that a person with a mortgage – known as a mortgagor in legal lingo – becomes unable to consistently make payments to their lender. There can be any number of reasons as to why this may happen: for example, a job loss can suddenly turn an otherwise good mortgage into a troubled one very quickly. Sometimes, a mortgagor can repair a mortgage loan by working out an agreement with the lender. But if such an agreement between the mortgagor and lending institution cannot be reached then the mortgagor will inevitably face foreclosure.

However, what not everyone realizes is that lenders are still obliged to act within certain ethical bounds even after a foreclosure has been implemented. All lenders – or “mortgagees” – must conduct themselves with “good faith” and exercise “due diligence” to see that the adverse impact of the default is kept to an absolute minimum. Failure to abide by these ethical standards is a serious issue and transgressors can face severe penalties. When a default occurs, mortgagees must try to reach an outcome which fairly settles the matter, they cannot simply view the default as an opportunity to enrich themselves.

The case of Murphy v. Financial Development Corporation (1985) provides a sense of what due diligence requires from a lending institution. This is a case which all mortgagors should be aware of, even those who figure they have not the slightest chance of ever falling into financial trouble.


The plaintiff (Murphy) suffered a job loss in early 1981 and fell behind with making payments on his mortgage loan. The plaintiff attempted to negotiate with the defendant (Financial Development Corporation) in order to repair the loan. However, the plaintiff was not able to successfully repair the loan and eventually the defendant sold the house at auction to one of its representatives in December of 1981.

The plaintiff had approximately $19,000 of equity in the home and owed roughly $27,000. The defendant sold the house to its representative for $27,000. Immediately following the sale to its representative, the defendant sold the house to a new buyer for $38,000. Hence, the initial sale of $27,000 to the defendant’s representative had the dual effect of making the defendant “whole” while failing to account for the plaintiff’s substantial equity. At the time of the auction, the house had a market value of around $46,000.

Though the defendant clearly acted in good faith by negotiating with the plaintiff and giving the plaintiff an opportunity to repair the mortgage, the question before the court was whether the defendant acted with due diligence by selling the house to its representative.


Whether a mortgagee has acted with due diligence when selling a house which has been foreclosed upon requires a case-specific analysis. In general, due diligence requires that a mortgagee expend reasonable effort to obtain a fair price for the property.


The court (Supreme Court of New Hampshire) upheld the decision reached by the trial court and ruled in favor of the plaintiff. The court determined that, in this instance, the defendant had acted in good faith but failed to exercise due diligence. The court based its decision on the following facts: the defendant put only a small amount of effort toward advertising the auction; the defendant did not place a minimum bid at the auction; the defendant accepted an offer substantially below the market value of the property; and the defendant immediately sold the property to a new buyer for a quick profit.

As mentioned before, the determination of whether due diligence has been exercised is a case-by-case analysis. In this case, though the defendant acted in good faith, it was clear that not enough action was taken in order to meet the requirement of due diligence.

All mortgagors need to be aware of this fact: even if you fall behind on your payments, you still need to make certain that your lender conducts itself according to prevailing ethical standards.

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Here at Huddleston Tax CPAs we spend a great deal of time focusing on issues which affect property owners. To learn more about the tax benefits of property ownership view the following video