Tax Benefits of Home Ownership
When a consumer considers purchasing or selling a home, they should consider the fact that there are many tax benefits that could potentially make owning a home quite profitable. By far, the buying of a home can be one of a consumers biggest investments. Due to various tax benefits put in place by the government to encourage consumers to purchase homes, buying a home could be a very wise decision. Ultimately, the consumer taking advantage of these tax benefits could save a great deal of money either at the time of purchase or the time of sell. Due to the various restrictions and conditions regarding these tax benefits, it is important to consult with one’s financial advisors or accountants to fully understand the benefits and opportunities of tax benefits to those who own homes.
By far, the deduction of mortgage interest stands to be one of the most advantageous tax benefits. The interest paid on various mortgages on the primary residence can often be deducted if the consumer ops to itemize deductions on their federal Income Tax Return. It is possible that the consumer could potentially claim a deduction for any interest that they have paid on mortgages for building, purchasing a home or even a mortgage taken for home improvement, as long as the house secures the mortgage. Many different factors can restrict a consumer from the opportunity to deduct this interest, so it is an absolute necessity to speak with one’s financial advisor or accountant.
Not all interest paid toward a mortgage is tax deductable. Typically, as long as the amount of the mortgage surpasses 1 million dollars (or 500,000 dollars if the consumer is married buy files their taxes independently), the interest paid towards the mortgage qualifies as a deduction. Any interest that exceeds these amounts typically does not qualify to be tax deductable.
Home Improvement and Repairs
Generally speaking, repairs or improvements made on the home cannot be deducted; however, home improvements made can make the house last longer, change it to be acceptable for a different use, or simply increase the home’s value, resulting in the consumer’s home becoming more tax valuable if the improvement is funded through refinancing or a second mortgage. Simply by adding features like an additional bathroom, swimming pool or covered porch, consumers can add value to their homes. At the same time, it is quite important to note that the costs associated with maintaining a home cannot be considered to be home improvements and thus cannot be claimed as a tax deduction. If repairs made become extensive thus becoming a remodel, the work performed could potentially be considered a home improvement and eligible for tax deduction.
Deducting Points and Closing Costs
Upon purchasing a home, it is easy for the consumer to become quite confused with the situation, let alone the handling of settlement charges when it is time to file income tax returns. More often than not, when a consumer takes a mortgage to buy a house, or to refinance their current home loan, the incurring of closing costs will be inevitable. Typically, these closing costs are comprised of fees to process the sale, fees to check the title, Points charged by the lender, fees to have the property appraised, fees to draft the contract, and fees to record the sale. It is important to be aware of the deductibility of these fees, as some could be attributed to the cost basis of the new home, whereas some can be deducted partially or completely on the consumer’s Federal Tax Return.
When a consumer takes out a mortgage, they are often charged costs by the lender called points. 1% of the mortgage taken out equals one point. Most often, points can be deducted as long as it is within the year that you bought the home and your deductions are itemized. If the consumer wishes to do this, requirements must be met to ensure eligibility. It is also possible that points may be deducted if they have been paid by the person selling the home.
It is also important to consider that mortgages made to refinance a home are handled by different standards. These points can only be deducted in portions yearly. Typically, the only exception to this rule is that if a portion of the mortgage is used for means of improvements made to the principle residence of the consumer, a certain amount of points can be deducted only in the year that the points have been paid.
Typically, it is not possible for the consumer to claim other closing fees on their income tax return. Tax basis adjustment in the home is the only alternative to the consumer in this regard.
Selling a Home and Capital Gains
When a consumer decided to sell their home, there are other implications to consider in terms of taxes. If the home is sold at a loss, typically it is not possible to claim the loss as a deduction on income tax returns. Upon selling the principal residence and making money on it, it becomes possible to either partially or completely exclude the capital gain from being applicable to being taxable.
Capital gain or loss on the sale of the consumer’s primary residence is equal to the subtracted adjusted basis in the property from the sale of the primary residence. The cost of the property is the adjusted basis in addition to any amounts paid in for home improvements, minus casualty losses and property depreciation that have been claimed as income tax deductions.
It is also possible for a consumer, regardless of age, filing single to exclude up to $250,000 of capital gain resulting from the selling of a primary residence from federal income tax upon meeting certain requirements. If the consumer is married and filing a joint return, up to $500,000 can be excluded barring certain requirements are met. Typically, whether the consumer is an individual or filling a joint return with a spouse, this exclusion can only be used every other year. As long as the home has been used at least 2 out of 5 years as the primary residence before the sale took place, the consumer may be eligible for this exclusion.
It is possible that while some consumers might not be eligible for the exclusion because they have not met the two out of five years rule, the consumer could possibly still have the opportunity to exclude a portion of the hain as long as the sale of the primary residence was because of changes in employment location, unforeseen situations and circumstances, or reasons of health. In situations like this, the exclusions of gain could potentially not be given completely, instead prorated.
It is also important to consider that there are different rules that could apply if circumstances are different.
- If the primary residence was used in part for business purposes or had a home office.
- If vacant land next to the consumer’s primary residence has been sold.
- If a trust owns the primary residence.
- If the primary residence was a rental property.
- If ownership of the primary residence was joint between the consumer and a single taxpayer.
Real estate investors also have numerous tax-advantaged options including programs like the IRC 1031 like-kind exchange.