Reduce Your Tax Burden Through Home Ownership
Here's a nice surprise...good news involving the word "taxes."
Recent changes in the tax laws have made real estate a more attractive investment than ever before. As a homeowner you are eligible to take advantage of these tax changes and deductions to keep more money in your pocket this year.
Profits from the sale of your home
Congress did homeowners a huge favor by passing the Taxpayer Relief Act of 1997. Today, you can exclude up to $250,000 in profits (or $500,000 if you are married and filing a joint return) from the sale of your primary residence from your taxable income. Previously, this type of deduction only applied to those who were age 55 or older.
Let's say a married couple purchased a home for $300,000 five years ago and sold it for $450,000 in 1998. They get to keep the $150,000 profit tax-free, provided they have lived in the home for at least two years. The IRS allows people of any age to claim the exemption each time they sell their home, but no more frequently than once every two years.
Homeowners looking to downsize will benefit the most from the tax change. You no longer have to reinvest the profits in a home that is similar in price to avoid paying capital gains tax, and you free up cash for additional investments like rental property, mutual funds, education and more.
Mortgage interest, real estate taxes and points
In most cases, the interest you pay on your primary mortgage and your real estate taxes are fully deductible on your tax return. Your lender will send you Form 1098, outlining the amount you paid in interest and real estate taxes over the course of the year.
Mortgage points are also deductible. If you bought a home last year, you can deduct the full amount of the points you paid as home mortgage interest. Meanwhile, if you sold a home in 1998 and paid points, you cannot deduct them as interest but you can claim them as a selling expense if your profit is subject to a taxable gain.
One last point about points. If you were one of the many homeowners who took advantage of low interest rates and refinanced your mortgage last year, the points you paid on the refinanced mortgage are not fully deductible on your 1998 return. You can, however, deduct refinancing points as mortgage interest over the life of the loan. And, if you are refinancing for the second or third time, don't forget to deduct the remaining balance of your previous refinance (those points not yet deducted). This extra deduction can be claimed in the same year your do your new refinance.
Home office deduction
Writing off your home office is a little tricky. To qualify for the home office deduction your office must be your principal place of business -- the place where you meet with clients, customers or patients -- and must be used exclusively for your business. Rooms that double as an office by day and family room by night do not apply. If you meet all of these criteria, you may be able to deduct a percentage of your real estate taxes, mortgage interest, utilities, depreciation and repairs.
Beginning in 1999, your home office may qualify under a new liberal definition of "principal place of business" if you use it for management and administrative tasks related to your business but meet with clients elsewhere. Under this new law, the home office deduction may be available to more homeowners.
Be sure to report any income you receive from rental property on your return and deduct your expenses as well. Allowable expenses include depreciation, repairs and operating expenses such as advertising, taxes, utilities and interest.
Since these rules are generalizations, it is best to consult with your tax advisor to find out how these deductions apply to you and your tax strategy. Meanwhile, please call me for more information about how a real estate investment can pay off and other benefits of homeownership.