Home ownership is becoming more and more profitable, thanks to many of the new tax laws that encourage home buying. The tax benefits associated with owning residential real estate are superior to most other investments. Homeowners can claim basic items as deductible, such as property taxes and mortgage interest charges. Deductions for home mortgage interest can apply to first or second homes. Rental properties also qualify for depreciation allowances as a tax benefit. Kendall Partners Ltd
Tax laws are frequently changing and your personal tax situation may be unique. It is important to consult a tax advisor before purchasing so you stay current and know how real estate ownership affects your personal tax return.
Some of today’s real estate tax codes have been in effect for a while. Specifically, interest paid on mortgage loans of up to 1 million dollars that is used to buy, build or substantially improve your property is fully deductible. Presently the mortgage limit is $500,000 for married couples filing separately. Interest on home equity loans is deductible for loans up to $100,000, and $50,000 for married persons filing separately.
Points are also allowed as itemized deductions. A point is equal to a percentage of the loan amount. The borrower is sometimes charged points by the lender. Points may be part of the up-front costs you are required to pay in order to get a mortgage loan. The government considers points as pre-paid interest, because they are payment for the use of money. It is important to remember that points can be deducted the year they are paid. If you borrow to pay these points, you can also deduct the resulting interest payments as part of your first mortgage deduction.
Another big advantage of home ownership, a “rollover benefit,” occurs when you sell your property. The tax on the profit of a sale of a primary residence can be deferred completely if you buy or build another house and meet a principal test and a time test. The time test requires that you live in a residence two of the last five years for it to be considered your primary residence.
A couple now can gain up to $500,000 and an individual can gain up to $250,000 in profits from the sale of a home tax-free. If you lose money on the sale of your home, you can’t deduct that loss from your taxes.
There are also tax breaks for home buyers who are having difficulty coming up with enough money for a down-payment on their first home. The government is allowing first-time home buyers to use their Individual Retirement Accounts to make initial down payments without paying a tax penalty. Gifts can be accepted to buy a house from the IRAs of parents or grandparents under the age of 59 with no penalty. Income tax must still be paid on any amount withdrawn.
A couple now can gain up to $500,000 and an individual can gain up to $250,000 in profits from the sale of a home tax-free.
In a few states, homestead laws are also in place which protect a family’s primary home, or homestead, from being seized by creditors, assuming your mortgage payments have been paid. Homesteads can also qualify for a partial exemption from property taxes. In Florida, for example, homeowners are allowed to deduct $25,000 from the assessed value of their primary residence. Since the property tax on a home is based on its assessed value, the effective tax paid on a homestead is reduced. This exemption may not be automatic and an application may have to be filed with your local government’s property appraisers office.