|
|
|
Owning a Home is Still One of the Best Tax Breaks Available - 2008-04-13 |
|
Tax day is looming for millions of Americans, and the deadline of this Tuesday at midnight will see many of us standing in line at the Post Office waiting to hand in our share of the national revenue. But if you bought, owned, or sold real estate during the last year, your burden may be a bit lighter due to the many tax incentives built into our tax code for homeowners.
There are many tax benefits associated with ownership of your home as a principal residence. They can be divided into three areas: (1) the purchase; (2) mortgage interest expense; and (3) profits from selling your home.
The most significant tax advantage in the buying process is the deductibility of loan discount points (including any loan origination fees). The IRS says discount points are deductible regardless of who pays them, as long as they are normal and reasonable for the area. In addition, you must then live in the house as your residence.
This is an unusual deduction, for it is rare that the IRS allows a deduction for an expense paid by another party. But in this case, Congress determined that many buyers prefer to include loan origination fees in the purchase price to hold down up-front cash expenditures, so they allow the buyer to have the instant deduction, even if the fee is paid by the seller. The IRS compensates for this generosity by decreasing your acquisition basis if your build these deductible fees into the price.
In the current buyers market, my advice is always to ask the seller to pay all your loan expenses. But if you end up having to pay anything, make sure it's the discount points. That way, you get the deduction now and don't suffer the capital gains effect of a lowered basis later.
The second area of tax benefit for home buyers is the interest expense on the loan you take out to buy your home. The interest you pay on your home mortgage is still 100% tax deductible in most cases.
Generally speaking, your deduction for home mortgage interest is limited to the interest you pay for the loan you used to first purchase your home, up to a debt limit of one million dollars. Know that, as you pay down your loan balance, your acquisition indebtedness decreases. Subsequently refinancing to a higher balance may not provide a total deduction for the new interest payment.
The one exception to this limit is an additional one hundred thousand dollars of home equity debt, regardless of the source. So if you originally borrowed $200,000 to purchase your home, then paid that balance down to $100,000, you could refinance for up to $200,000 later and still deduct all the interest expense. Interest on debt above that level might not be deductible. Check with your CPA for details.
Lastly, PMI fees may be deductible if you qualify. You must have purchased your home during 2007 and your Adjusted Gross Income must be under $100,000. Other closing costs are not deductible.
The last category is tax breaks when you sell. Here, the big break is formally known as The Exclusion of Gain on the Sale of your Principal Residence. It is better known by it's nickname, Section 121.
Generally speaking, if you have owned and occupied a house for two of the last five years as your principal residence, you are eligible to exclude certain amounts of the capital gain from taxation. If you are married and file a joint tax return, you can exclude up to $500,000 for each residence you sell. If you are single, the limit is $250,000.
There is no requirement that you reinvest in anything, and you are free to do with the money as you please. Furthermore, you can do this every two years for the rest of your life. This is a truly remarkable tax break that is only available to home owners, so I suggest you take advantage of it.
Several years ago, many questions arose about homeowners who sold their homes having occupied them for less than the two year period, and whether or not they might get some sort of reduced benefit. In a generous response, the IRS ruled that you can take a pro-rated portion of this exclusion, based on the percentage of the required occupancy period you meet. However, you may take the pro-rated potion only if you experience a change in employment or health, or if you have an "unexpected circumstance" in your life.
Because the tax benefit associated with selling your principal residence is potentially so large, it is important to understand it fully. You can download IRS publication 523 from the tax agency's website at irs.gov, but it's also wise to check with your CPA for all the details.
By the way, if you are like many readers who are wishing they started on their tax return many weeks ago and now dread the work needed to complete the task by Tuesday at midnight, you can just as easily file a request for an automatic extension of time to file.
It's called Form 4868, it's easy, and you can also download it for free at irs.gov. Simply enter the form number in the search box and follow the instructions. Then you have another six months to put off the inevitable paperwork.
|
|
Upcoming Events
The May series of Seminars is entitled "Short Sales, Subject To's and Bank REO Sales... How You Can Beat the Real Estate Market Like A Drum in 2008!"
In all the years I have been investing in real estate, I have never seen opportunity like this. The moon is in the seventh house and Jupiter is aligned with Mars, and for the next 12 to 18 months, you have a window of opportunity to buy quality investment houses at discounts that were simply unheard of a couple of years back.
Come meet with me at one (or more!) of four locations in May:
- Northside, Tuesday, May 6th - Holiday Inn Select, Chamblee-Dunwoody Road, 6:15 - 9:30 PM
- Southside, Thursday, May 8th - Holiday Inn Atlanta Airport North, Virginia Avenue, 6:15 - 9:30 PM
- Norcross, Saturday, May 10th - Simpsonwood Conference Center, Jones Bridge Circle - 2:00 - 5:15 PM
- Savannah, Monday, May 12th - Spiva Law Center, Abercorn Street - 6:15 - 9:30 PM
All this for only $29! Bring a friend for an extra $20. Click on the "Seminars" banner, read more about it and sign up now!
This course has been approved by the Georgia Real Estate Commission for Three Hours of Real Estate Continuing Education Credit.
The Real Estate Investors Institute will be held at Emory University on May 17, 18 & 19, 2008. You may read about it and register online under the "Seminars" banner.
Latest Products
Advanced Foreclosure Package
$697.00
Add to Cart
|
101 Ways to Improve Your Real Estate Investing
$19.96
Add to Cart
|
|
Written Resources