Home ownership—it’s the American dream, isn’t it? It’s also a taxpayer’s dream, because home ownership is full of tax benefits. The interest on your mortgage payments and real estate taxes—it’s deductible. Settlement or closing costs when you buy your home—some are deductible. Capital gains you realize when you sell your home—exempt from taxes, with some restrictions. And if you use a part of your home for business, you may be able to claim a tax deduction for some of your house expenses. In short, home ownership may be your most profitable investment, from a tax standpoint.
Let’s take a closer look at some of these tax benefits. Keep in mind that this article is for informational purposes only and is not intended as legal, accounting, or tax advice. You should consult a tax professional for details.
The Home Mortgage Interest Deduction
If you itemize deductions on your federal income tax return, you can generally deduct all of the interest you pay on any loan that is secured by your home, whether that loan is called a mortgage, a second mortgage, a home equity loan, a line of credit, or a home improvement loan. This applies to both your principal residence and a second home. You can deduct the interest on up to $1 million of home acquisition debt ($500,000 if you’re married and file separately). You can also deduct the interest on certain home equity loans, regardless of how you use the loan proceeds, with two limitations:
•Your deduction is limited to interest on the amount of debt that does not exceed the equity in your home (the fair market value of your home minus the total acquisition debt on that home)
•Your deduction is limited to interest on up to $100,000 (or $50,000 if you’re married and file separately)
For complete information on the home mortgage interest deduction, see IRS Publication 936 Home Mortgage Interest Deduction, available online at http://www.irs.gov or at your local IRS office.
The Real Estate Tax Deduction
Homeowners can also deduct real estate taxes, whether the state, county, city, township, or some other local government body imposes them. This applies to all the real estate you own—this deduction is not limited to just your primary and secondary homes, as is the home mortgage deduction. Only the person who owns the property can claim the deduction.
The Closing Costs Deduction
When you buy a home, or refinance an existing one, there are generally a number of closing costs, including attorney’s fees, recording fees, title search fees, document preparation and processing fees, as well as points. Points are fees charged by your lender when you take a loan secured by your home. Each point is one percent of the amount borrowed. Generally, you could deduct points as mortgage interest but you’d have to spread your deduction out over the entire life of the loan. If you itemize deductions on your tax return, you can deduct points in the year you buy your principal home, provided you meet certain requirements (these requirements are listed in IRS Publication 936). You can even deduct points that the seller pays for you.
Other non-deductible closing costs that can be added to the tax basis of your home include attorney’s fees, abstract fees, charges for installing utility services, recording fees, title search fees, document preparation and processing fees. For more information, see IRS Publication 530 Tax Information for First-Time Homeowners available online at http://www.irs.gov or at your local IRS office.
The Home Office Deduction
You may be able to claim a deduction for certain home expenses if you use a part of your home for business. Even if you don’t qualify for a home office deduction, you may be able to deduct certain business expenses, such as office supplies, postage, or the cost of adding a second telephone line. You may also be able to depreciate the cost of computers and other business machines as well as office furniture you use at home. The requirements for the home office deduction are fairly strict, and the calculations fairly complicated—see IRS Form 8829 Expenses for Business Use of Your Home and the Instructions for Form 8829 available online at http://www.irs.gov or at your local IRS office.
The Tax Treatment When You Sell Your Home
If you’re lucky enough to sell your home for more than you paid for it, you may be able to exclude the gain from federal income taxes. You can exclude up to $500,000 of gain if you are married, file a joint tax return, and the home was your principal residence for at least two out of the last five years preceding the sale. If you’re not married or file a separate return, you may exclude up to $250,000 of gain. For example, let’s say you and your spouse bought your house five years ago for $100,000 and are selling it today for $300,000. Your entire gain of $200,000 ($300,000 – $100,000) is excludable, which means you don’t have to report it on your income tax return. This exclusion can be used every two years. In certain situations, you may be able to prorate exclusion of the gain if it occurs within two years of a previous capital gain exclusion if the sale of your home was due to a change in place of employment, health reasons, or other unforeseen circumstances. If you sell your principal residence at a loss, you generally cannot deduct the loss on your tax return. For more information, see IRS Publication 523 Selling Your Home available online at http://www.irs.gov or at your local IRS office.
The tax benefits associated with buying a home, selling a home, and all the time in between truly make home ownership a taxpayer’s dream. Consult your tax professional to make sure you take advantage of all the tax benefits you’re entitled to.
For more info, visit the buyer’s center at http://www.JosephCapote.com
Pilfered from IRS.gov – http://www.irs.gov
Filed under: Buyer's Blog, mortgage interest tax benefits, tax benefits of home ownership, tax benefits real estate
Joe Capote 