TAX Resources » Tax$aversHomeownersUnderstanding the tax benefits of home ownership.There are many tax advantages to owning a home. The major tax advantages include:
To ensure you receive full advantage of these tax breaks, you must keep thorough records including:
When Buying A HomeTo take advantage of a home’s tax benefit, you must first be able to afford a home. It often helps to understand how the bank looks at your ability to buy. Some mortgage basics are: Tax$aver Tip: Many of these expenses are negotiable among you, the seller and the lender and can be added to the mortgage loan. 28/36 Rule: Typically banks or mortgage companies use a 28/36 Rule to determine your maximum mortgage loan amount. They assume you can afford to pay up to 28% of your income on mortgage principle, interest, property taxes and homeowners insurance combined. They also look at your total debt (for the home, auto loans, credit card balances and other loans) to make sure it is no more than 36% of your income. What Is DeductibleThe deductibility of homeowner expenses (mainly mortgage interest and property taxes) is one of the last significant areas of tax deductible expenses individuals can use to offset income and thereby reduce their annual income tax. Deductible expenses include:
Tax$aver Tip: You must lower the base price of the home by seller paid “points” to compute the gain when you sell.
What Isn’t Deductible
When You SellWith current tax laws you may be able to exempt up to $500,000 for married couples, $250,000 if you are single, of your gain when selling your house. This tax free gain went into effect for home sales after May 7, 1997 and can be used once every two years for your primary residence. To compute this gain you must subtract your home basis (the purchase price of your home plus any home improvements) from the adjusted selling price. Tax$aver Tip: Check to see if the gain exclusion fits your situation. Selling your appreciated home may be a good way to capture tax free gains. Under the old law you qualified for a gains rollover as long as you bought and lived in your next house within two years and the price of your next home was at least as much as the adjusted selling price of the home you sold. These gain rollovers must still be taken into account when you sell. Tax$aver Tip: Remember to continue to save all receipts for home improvements even though you may not have to report a gain. Many homeowners fail to anticipate their homes’ appreciation in value over time. Home ImprovementsThe need to track home improvements has diminished with the ability to exclude from tax up to $500,000 of the gain when your home is sold. All qualified home improvements can be added to your home’s cost (basis), thereby reducing the taxable gain when you sell. However, if you think you no longer need to keep track of improvements be careful. It is still recommended that you keep records of any improvements to your home. This is especially true if:
Improvements Vs Home Repair/MaintenanceTypes of home improvements that add to your home’s basis include: adding a room, finishing an unfinished basement, adding a new roof, or paving your driveway. Types of home repair/maintenance you may not add to your home basis are general repairs that simply keep the house in its original condition such as painting, wallpapering, fixing leaks, and plastering. These expenses can be used as an improvement if they are done in conjunction with remodeling or a restoration project. Home OfficeA home office deduction is available to you if:
You are limited to home office deductions equal to but not greater than the gross income of the business less non-home-use business activity expenses. The allocation of the home use expenses on a proportionate share basis cannot create or increase a net loss in the business. Home Office tax rules can be complicated. Should you have questions or need more information, call for an appointment. Vacation Home RentalYour vacation home is another potential source for tax advantages. Briefly, the rules are:
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