Even after a devastating housing crash, the majority of Americans have not given up the idea that home ownership represents their economic dream.
When a builder plans to build a home, does he not consider the cost? Before you purchase, you should make sure you really can afford all of the costs of home ownership (mortgage, property tax, repairs, insurance, homeowner’s association dues, and utilities, just to name a few!)
Tax BENEFITS for 2017:
- Mortgage interest reduces your taxable income. This is a great benefit when compared to paying rent. Be aware that if your loan is more than 1.1 million dollars, which it can easily add up in many areas of the US, any interest paid may be limited. As of 2012, your total mortgage on two homes cannot exceed the $1.1 million amount.
- Mortgage interest on a second property also reduces your taxes. This includes a vacation home, second home or even a RV.
- Property tax reduces your taxable income. If you know your income is going to be higher in one year than it will be in the following year, a tax strategy might be to pay an extra payment of property tax to offset the anomaly of higher income.
Tax BENEFITS for 2018:
The Tax Cuts and Jobs Act made changes to home ownership-related deductions.
- Mortgage interest still reduces your taxable income, but there is a limit on loans of more than $750,000. The limit is higher if your mortgage debt dates prior to December 15, 2017.
- Property tax reduces your taxable income, but there is now a deduction limit of $10,000 against state and local income taxes for years 2018-2025.
Remember these facts when buying or selling your home:
- You can deduct the points paid in escrow when you purchase your home.
- You can deduct the points paid in escrow when you refinance your home, but the deduction is taken over the number of years that the loan is for (15 year loan/30 year loan). When you sell or refinance again, you can deduct the rest of the points not taken.
- When you sell your home, there is a $250,000 exclusion for single taxpayers and $500,000 for married taxpayers. What this means is that if you sell your house for a gain, you will not need to pay taxes on any gain under these amounts. Any gain over these amounts will be taxed.
- Taxpayers can exclude the first $250,000 for single and $500,000 for married couples as long as they have lived in the home for at least 2 out of 5 years prior to the sale. If this test is not met, the exclusion cannot be used.
- Gain on the sale of a home can be offset with any improvements or closing costs.
- Keep track of all your large improvements on the home over the years of owning. Keep a file folder with all receipts and invoices. Examples of improvements would be: roofs, driveway, windows, new bath or new kitchen, tile or hardwood floors, new landscaping, etc. This does not include repairs or maintenance work.
- When you sell your house at a loss, this loss does not reduce your other income. The loss is lost and there is no tax benefit.
- When a home is sold, the owner will receive a 1099-S which will show the address, date of sale, gross proceeds, etc.
- Be aware that when you sell your home and there is a gain to report, you may be subject to paying Affordable Care Act taxes called Net Investment Income Tax. This NIIT is 3.8 percent of approximately your total investment income (bank interest, dividends, stock sales, rental income and gain on the sale of the home). This tax kicks in when a Single tax payer earns more than $200,000 and a married couple earns more than $250,000.