Tax Laws Shelter Your Home

Taxes are something we all face every year, but if you've bought, sold or refinanced a home in the past year, you should review the tax implications. Here are some basic home-related tax facts you should be aware of. Be sure to consult a tax professional for complete information applicable to your specific situation. TAX RATES     TAX FACTS: Tax rates favor homeowners. Currently, there are six tax brackets, ranging from 10% to 35% depending upon taxable income amount and filing status. Home ownership is made affordable for many families because of how Uncle Sam’s tax deductions result in the federal government contributing 10%, 15%, 25%, 28%, 33% or 35% toward monthly home mortgage interest and property tax payments!      HELPFUL HINT: Many homeowners overpay taxes simply by overlooking deductible items. Get one of many tax preparation books available that list deductible items to jog your memory. INTEREST     TAX FACTS: Interest payments on a residential mortgage — assuming the mortgage isn't larger than the purchase price of the home — are frilly deductible in most circumstances. That’s a key reason why home ownership is a superb tax shelter. Mortgage interest on a second home is also deductible, as explained in the “VACATION HOMES” section. If you own a third home for personal purposes, the mortgage interest is treated as “consumer loan” interest and is not deductible. Interest on home equity loans (see “EQUITY LOANS” section) is deductible, with some limitations.     HELPFUL HINT: If you are planning to buy a home with a large amount of cash, consider carefully if you plan to ultimately finance the property. For interest to be deductible on a financing more than 90 days after closing, it will be limited to the acquisition loan balance plus $100,000, unless the new financing is used to improve your home. GAINS     TAX FACTS: Taxpayers who sell their principal residence, can pocket— tax-free — as much as $500,000 in profit if they file federal taxes jointly, or $250,000 if they file singly. The property must have been owned and used as their principal residence for any two of the prior five years. Homeowners can shelter the profits on the sale of a home as often as once every two years. If the two-year use and ownership tests are not met, but the home is sold because of special circumstances (i.e., health,job loss, etc.), the exclusion is prorated. Otherwise, gains above $500,000 or $250,000 are taxed at current capital gains rates, which vary depending on your tax bracket.     HELPFUL HINT: Homeowners should continue to maintain records of selling and improvement expenses because some states still tax capital gains on home sales. In addition, those expenses can be used to determine your tax basis once you sell the home. RENTALS     TAX FACTS: If you have an adjusted gross income of$ 100,000 or less (not counting any loss from “passive activities,” deductions for IRA contributions or taxable Social Security benefits), you can deduct up to $25,000 in losses from rental real estate against income from other sources. This is an allowable deduction if you owned at least 10% of the property and “actively participated” in its management. (If you chose the tenants and approved outlays for maintenance, for example, that’s considered “active” participation.) If your adjusted gross income is between $100,000 and $150,000, you can still deduct some or all of your losses from rental real estate, depending on the amount of the loss.     HELPFUL HINT: Don't forget, if any rent losses were ~~suspended” in prior years, they are fully deductible in the year the property is sold. MOVING     TAX FACTS: If you moved to a new home because of a new job or job transfer, you may qualify for a moving expense deduction. The distance between the old home and the new job must be at least 50 miles more than the distance between the old home and the old job. The location of the new home is not considered. Whether a homeowner or renter, you can deduct the cost of moving household goods and the direct cost of moving you and your family. You can also deduct expenses for lodging during the move but not meals.     HELPFUL HINT: While realty commissions, lawyers’ fees and other closing costs are no longer deductible as moving expenses, these costs can reduce capital gains by adding to the cost basis or reducing the adjusted sales price. See IRS Publication 530, “Tax Information for First-Time Homeowners.” VACATION HOMES     TAX FACTS: Vacation homes have separate tax rules depending on the owner’s personal use days. A residence is a vacation home if it was used personally more than 14 days or 10% of the days it was rented (if rented more than 140 days).     For a vacation home, all mortgage interest and property taxes are generally deductible, either as rent expenses or as additional itemized deductions. If there was rent income, other property expenses may be deductible, including depreciation, but only up to the amount of the rent income (losses are not allowed).     HELPFUL HINT: For non-vacation rental homes, you may claim rent expense deductions other than interest and taxes, even if it results in a loss. When personal use of a vacation home is involved, deductions are determined by allocating expenses, including interest and taxes, between the rental and personal use periods. If you rent your vacation home (or principal residence) for 14 days or less a year, you do not have to pay taxes on that rental income. POINTS     TAX FACTS: For home buyers, deductible expenses include settlement charges for points. Deductible points are up-front charges for the use of money (not services). One point equals 1% of the loan amount. Points paid by either the buyer or seller are deductible by the buyer in the year of the purchase.     HELPFUL HINT: If you are buying a home and need financial assistance from the seller, consider having them pay for as many points as possible, thereby increasing your tax deduction. DEPRECIATION     TAX FACTS: Taxation of depreciation claimed on real property works as follows: For a principal residence on which depreciation was taken up to May 7,1997, the gain is not taxable as long as it doesn't go over the $500,000 or $250,000 threshold. For a principal residence on which depreciation was taken after May 7, 1997, the amount of gain equal to the depreciation taken is taxed at a maximum 25% rate, because that portion of the gain is not eligible for gain exclusion. For a rental property or second home on which depreciation was taken either up to or after May 7,1997, the gain equal to the depreciation taken is taxed at a maximum 25% rate.     Regardless of whether the property was a principal residence, rental property or second home, the depreciation taken increases the amount of gain upon sale.     HELPFUL HINT: If you've been claiming depreciation for a home office, you may want to stop. Unlike the old rules that let you avoid taxes by converting to personal use prior to sale, all depreciation after May 6,1997 is subject to tax when the property is sold. Additionally, if, at the time of sale the home office had not been part of the principal residence for at least two out of the previous five years, the home office percentage of the gain will be considered frilly taxable regardless of the $250,000 or $500,000 exclusion. EQUITY LOANS     TAX FACTS: Interest is fully deductible on home equity loans up to $100,000— in contrast to other types of loans regardless of how the proceeds are used. A home equity loan, including a second mortgage or equity credit line, is a loan secured by a primary or second home. The loan, when added to other debt secured by the residence, can't exceed the fair market value of the property. (Some state laws restrict home equity loans. Give us a call to learn more.)     HELPFUL HINT: Interest paid on credit cards or other types of personal loans, such as car loans, is not deductible. For many owners, it makes tax sense to pay off this kind of debt with a home equity credit line or loan. HOME OFFICE     TAX FACTS: The definition of home office was liberalized beginning in 1999. Now if you keep records, schedule appointments and carry on other such activities from your home office, some common home office expenses, such as utilities, insurance, repairs, cleaning, and depreciation, may qualify for a deduction, even if you do the actual work in another location. Be aware, however, any depreciation claimed after May 6, 1997, will be taxed at 25% if the residence is sold for a gain, whether or not the property has been converted to personal use. Note, too, that to qualify for the $500,000 or $250,000 exclusion on the sale of your residence, it must have been owned and used as your principal residence for two out of the previous five years. If the home office portion of the residence flunks this test, the home office percentage of the entire gain will be frilly taxable.     HELPFUL HINT: If you or your family use your home office for non-business purpose, it cannot be claimed on your tax return. Not claiming a home office for the two years prior to sale may save taxes if the home is being sold for a gain. For more information. see your tax advisor. LOCAL TAXES     TAX FACTS: Real estate property taxes and state and local income and personal property taxes are frilly deductible.     HELPFUL HINT: If you sold or bought property during the year, you may have paid or been refunded real estate taxes without being aware of it. See closing statement for any prorations. E-Mail Laura at: laura@lauragilley.com today!