Tax Savings from Home Ownership

This is true for most but not all homeowners.  To take advantage of this tax benefit, you must be able to itemize your deductions.  Itemized Deductions are reported on Schedule A and include large medical expenses, property and state income taxes, mortgage interest, charitable contributions and employee business expenses.  You can choose to use your itemized deductions or the standard deduction, whichever is higher.

 

 For 2006, the standard deduction will be $5,150 for single taxpayers, $7,550 for Head of Household filers and $10,300 for married couples filing jointly (These can change each year).

 

If you purchase a home late in the year, the mortgage interest and property taxes you have paid will probably be very low, and you might not see a tax advantage until the following year.

 

Also, homeowners who have lived in their homes for a long time, may receive very little tax benefit because they may be nearing the end of the loan term and a larger portion of their monthly house payment is being applied to the loan’s principal rather than to the interest. 

 

Remember, every deductible expense you incur does not necessarily result in a tax deduction. 

 

This one is absolute hogwash!  Expenses such as association fees, property insurance and private mortgage insurance are considered personal expenses and, therefore not deductible expenses.    Basic maintenance, repair and home improvement costs are not deductible either.  You can’t deduct the expenses for your new roof or that beautiful new kitchen you now have.

 

But even though you can’t deduct these things on your tax returns, you will benefit from home improvement expenses if you sell your home.  These costs will affect the home’s tax basis, and a home’s tax basis is critical when you decide to sell the property.  So keep those home improvement receipts, as well as the original purchase price and costs, in a safe place because they could save you money when it comes time to sell the ol’ homestead. 

 

Selling your home leads us to common belief #3.

 

Again, this is not true.  Many years ago, you had to invest in another home of equal or greater value to avoid a tax on the sale of your home.  But in 1997, the home-sale tax law was changed.

 

Today different rules apply.  If you live in the home for two of the five years before you sell, no tax is applicable on sale profit of up to $250,000 for single taxpayers or $500,000 for married taxpayers filing jointly.  This is beneficial for people who sell their homes every few years.

 

But those who buy a home and hold on to it for many years may find that they have reached the point where the gain exceeds the exclusion.  They may discover that they owe a large tax bill.  The profit from the sale might also push them into a higher tax bracket and could make them ineligible to take some deductions, credits or exemptions they have been entitled to in previous tax years.  It can also trigger the dreaded Alternative Minimum Tax.  In cases like this it’s a good idea to seek advice from SlackTax, Inc. before you sell your home to avoid any unpleasant surprises.

 

This one is considerably more complicated because it combines confusion about residential taxes with the even more complex subject of estate-tax planning.

 

If your goal is to avoid probate, keep the home in the family or get the property out of your estate for tax purposes, you need to carefully consider the circumstances that may be created by putting your child on your home’s title as owner or joint tenant.  Each of these options carries with it the possibility of creating tax liabilities for your children that may outweigh the benefits you are trying to achieve.

 

The complexity and variables that come into play when trying to obtain the maximum tax benefits for you and your family are far too many to address in this article.  To accomplish this task, we recommend that you seek out the advice of both a qualified tax planning professional like SlackTax, Inc. and an estate planning professional to assist you in making the changes necessary to accommodate your specific needs and achieve your goals.

 

If you would like more information about any of these topics or need assistance with any type of tax, bookkeeping, payroll or investment strategies, please contact us through this website, or call our office at 714-755-1040.  

This idea, like #2 is completely false.  While real estate, like any other asset, has the potential to go down in value, you cannot write off the loss that results from selling your home for less than what you paid for it.

 

Tax law classifies your home as personal property, just like your furniture or your car.  When you sell these things for less than the original purchase price, you can’t deduct the loss.  Well, the same rule applies to your home.

 

But if you sell that same personal property at a profit, the tax law says that you are required to pay tax on the gain.   We agree, this may not seem fair or right, but it is the law.