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Are you a new homeowner or considering purchasing a new home? If so, you may be wondering what the tax implications are for owning a home. And if you’ve sold a home in the last year or plan to sell one this year, conversely, what are the tax implications of selling your home? As with most complicated financial situations, it’s wise to consult a certified accountant to help you figure out all the tax implications of home ownership or sale. However, there are some easy to understand consequences of ownership and sale of a home. Let’s look at a few of those.
Tax benefits of owning a home
For most Americans, a home is your most valuable asset. You invest many tens of thousands of dollars to purchase it. And you invest more money in taking care of it. The good news is that the US tax code allows you to deduct your mortgage interest and property tax payments. The IRS publishes Publication 530 Tax Information for Homeowners which is the primary source of guidance about your home and federal tax. If you’ve not read an IRS publication in a while, you may be surprised at how clear the language is. The IRS has worked to make their publications clearer!
Tax deductions for homeowners
Bonnie Lee writing for Fox Business says, “You can deduct mortgage interest and property taxes on Schedule A, Itemized Deductions. You will receive a Form 1098 from the lender in January of each year showing how much you paid in mortgage interest. If you have an impound account with the lender, the total amount paid in property taxes will be reflected on this form as well.”
According to the tax pros at Professional Services Group (PSG), “In order to take the homeowner deductions: interest, taxes and points, it is necessary to itemize all of your deductions.” To itemize, you must use Schedule A of FORM 1040.
Robert Berman, of PSG, explains, “Home ownership and tax deductions are not synonymous. If your tax liability is lower than the Standard Deductions allowed, you may not realize any savings. The more your tax liability, the greater the benefit.”
If you’re paying mortgage insurance, you might be able to deduct the premiums paid if it is qualified mortgage insurance. “Qualified mortgage insurance is,” as defined by the IRS “mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance...” Take note, there is a qualification regarding mortgage insurance premiums — only mortgage insurance premiums paid on a mortgage insurance contract issued after January 1, 2007, are deductible as an itemized deduction.
If you’ve purchased a new home in the last tax year, review your settlement statement because in some instances, loan origination fees (points) are deductible advises Ms. Lee in her article on Fox Business.
Tax implications of selling a home
If you’ve sold a home, the IRS has a special publication for you as well. Selling Your Home, Publication 523 if chock full of information about the tax implications of selling a home. According to TurboTax, “Most home sellers don’t even have to report the transaction to the IRS.”
If you sold your home at a profit, and the home being sold was your primary residence for two out of five years, and have not excluded any other profit from a home sale within two years of the sale of this home, and your home sales profit was $250,000 or less, the profit is tax free. If you’re married, and file jointly, “the tax-free amount doubles to $500,000” states TurboTax.
Members of the military may have trouble meeting the two out of five-rule due to long deployments. BankRate advises, “a law change in 2003 exempts military personnel from the two-year use requirement, for up to 10 years, letting them qualify for the full exclusion whenever they must move to fulfill service commitments.”
There are some limitations on the exemption of profits from taxation. If you’ve used any portion of your home for business and taken the home office deduction, you must re-capture that deduction at the time of your sale. BankRate notes, “The issue arises when the IRS "recaptures" the tax on the depreciation of any business use of a sold property. Essentially, Uncle Sam wants to make sure the Treasury gets back some of the depreciation benefits you claimed over the years. This comes into play if you took a home office deduction in the last 11 years, specifically since May 6, 1997.”
It’s essential that you keep accurate records of all financial transactions dealing with your home. From your closing statements, to real estate tax payment receipts to local governments, to receipts for capital improvements on your home, you will need each of these pieces of documentation at some point in figuring your taxes.
Make it easy on yourself and set up a special file box that is solely for items related to your home, it’s taxes, improvements, and insurance. This way, when you need a particular document, you’ve got it at hand.
As we noted at the opening of this article, we recommend you consult a knowledgeable tax specialist who can advise you based on your particular circumstances. Getting your tax submissions done properly is important and prevents anxiety and issues.
Publisher cannot assure the accuracy of the above statements. Please consult a tax professional.
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