Financial Intel Monthly

Tax Benefits of Home Ownership

May 31, 2019 1:25:12 PM / by The Retirement Group (800) 900-5867


In tax lingo, your principal residence is the
place where you legally reside. It’s typically the place where you spend most
of your time, but several other factors are also relevant in determining your
principal residence. Many of the tax benefits associated with home ownership
apply mainly to your principal residence — different rules apply to second
homes and investment properties. Here’s what you need to know to make owning a
home really pay off at tax time.

Deducting mortgage
interest

One of the most important
tax benefits that comes with owning a home is the fact that you may be able to
deduct any mortgage interest that you pay. If you itemize deductions on
Schedule A of your federal income tax return, you can generally deduct the
interest that you pay on debt resulting from a loan used to buy, build, or
improve your home, provided that the loan is secured by your home. In tax
terms, this is referred to as “home acquisition debt.” You’re able to deduct
home acquisition debt on a second home as well as your main home (note,
however, that when it comes to second homes, special rules apply if you rent
the home out for part of the year).

For mortgage debt
incurred prior to December 16, 2017, up to $1 million of home acquisition debt
($500,000 if you’re married and file separately) qualifies for the interest
deduction. If your mortgage loan exceeds $1 million, some of the interest that
you pay on the loan may not be deductible.

For mortgage debt
incurred after December 15, 2017, up to $750,000 of home acquisition debt
($375,000 if you’re married and file separately) qualifies for the interest
deduction. If your mortgage loan exceeds $750,000, some of the interest that
you pay on the loan may not be deductible.

A deduction is no longer
allowed for interest on home equity indebtedness. Home equity used to
substantially improve your home is not treated as home equity indebtedness and
can still qualify for the interest deduction.

For more information,
see IRS Publication 936.

Mortgage insurance

You can generally treat
amounts you paid during 2017 for qualified mortgage insurance as home mortgage
interest, provided that the insurance was associated with home acquisition
debt, and was being paid on an insurance contract issued after 2006. Qualified
mortgage insurance is mortgage insurance provided by the Department of Veterans
Affairs, the Federal Housing Administration, the Rural Housing Service, and
qualified private mortgage insurance (PMI) providers. The deduction is phased
out, though, if your adjusted gross income was more than $100,000 ($50,000 if
married filing separately).

Starting in 2018,
amounts paid for qualified mortgage insurance are generally not deductible.

Deducting real estate
property taxes

If you itemize
deductions on Schedule A, you can also generally deduct real estate taxes that
you’ve paid on your property in the year that they’re paid to the taxing
authority. However, for 2018 to 2025, individuals are able to claim an itemized
deduction of up to only $10,000 ($5,000 for married filing separately) for
state and local property taxes and state and local income taxes (or sales taxes
in lieu of income taxes). Previously, there were no dollar limits.

If you pay your real
estate taxes through an escrow account, you can only deduct the real estate
taxes actually paid by your lender from the escrow account during the year.
Only the legal property owner can deduct real estate taxes. You cannot deduct
homeowner association assessments, since they are not imposed by a state or
local government.

AMT considerations

If you’re subject to the
alternative minimum tax (AMT) in a given year, your ability to deduct real
estate taxes may be limited. That’s because, under the AMT calculation, no
deduction is allowed for state and local taxes, including real estate tax.

Deducting points and
closing costs

Buying a home is
confusing enough without wondering how to handle the settlement charges at tax
time. When you take out a loan to buy a home, or when you refinance an existing
loan on your home, you’ll probably be charged closing costs. These may include
points, as well as attorney’s fees, recording fees, title search fees,
appraisal fees, and loan or document preparation and processing fees. You’ll
need to know whether you can deduct these fees (in part or in full) on your
federal income tax return, or whether they’re simply added to the cost basis of
your home.

Before we get to that,
let’s define one term. Points are certain charges paid when you obtain a home
mortgage. They are sometimes called loan origination fees. One point typically
equals one percent of the loan amount borrowed. When you buy your main home,
you may be able to deduct points in full in the year that you pay them if you
itemize deductions and meet certain requirements. You may even be able to
deduct points that the seller pays for you. More information about these
requirements is available in IRS Publication 936.

Refinanced loans are
treated differently. Generally, points that you pay on a refinanced loan are
not deductible in full in the year that you pay them. Instead, they’re deducted
ratably over the life of the loan. In other words, you can deduct a certain
portion of the points each year. If the loan is used to make improvements to
your principal residence, however, you may be able to deduct the points in full
in the year paid.

What about other
settlement fees and closing costs? Generally, you cannot deduct these costs on
your tax return. Instead, you must adjust your tax basis (the cost, plus or
minus certain factors) in your home. For example, you’d increase your basis to
reflect certain closing costs, including:

1.   
Abstract fees

2.   
Charges for installing
utility services

3.   
Legal fees

4.   
Recording fees

5.   
Surveys

6.   
Transfer or stamp taxes

7.   
Owner’s title insurance

 

For more information,
see IRS Publication 530.

Tax treatment of home
improvements and repairs

Home improvements and
repairs are generally nondeductible. Improvements, though, can increase the tax
basis of your home (which in turn can lower your tax bite when you sell your
home). Improvements add value to your home, prolong its life, or adapt it to a
new use. For example, the installation of a deck, a built-in swimming pool, or
a second bathroom would be considered an improvement. In contrast, a repair
simply keeps your home in good operating condition. Regular repairs and
maintenance (e.g., repainting your house and fixing your gutters) are not
considered improvements and are not included in the tax basis of your home.
However, if repairs are performed as part of an extensive remodeling of your
home, the entire job may be considered an improvement.

Exclusion of capital
gain when your house is sold

If you sell your
principal residence at a loss, you generally can’t deduct the loss on your tax
return. If you sell your principal residence at a gain you may be able to
exclude some or all of the gain from federal income tax.

Generally speaking,
capital gain (or loss) on the sale of your principal residence equals the sale
price of your home less your adjusted basis in the property. Your adjusted
basis is the cost of the property (i.e., what you paid for it initially), plus
amounts paid for capital improvements, less any depreciation and casualty
losses claimed for tax purposes.

If you meet all
requirements, you can exclude from federal income tax up to $250,000 ($500,000
if you’re married and file a joint return) of any capital gain that results
from the sale of your principal residence. Anything over those limits is
generally subject to tax. In general this exclusion can be used only once every
two years. To qualify for the exclusion, you must have owned and used the home
as your principal residence for a total of two out of the five years before the
sale.

For example, you and
your spouse bought your home in 1981 for $200,000. You’ve lived in it ever
since and file joint federal income tax returns. You sold the house yesterday
for $350,000. Your entire $150,000 gain ($350,000 – $200,000) is excludable.
That means that you don’t have to report your home sale on your federal income
tax return.

What if you fail to meet
the two-out-of-five-year rule? Or what if you used the capital gain exclusion
within the past two years with respect to a different principal residence? You
may still be able to exclude part of your gain if your home sale was due to a
change in place of employment, health reasons, or certain other unforeseen
circumstances. In such a case, exclusion of the gain may be prorated.

Additionally, special
rules may apply in the following cases:

1.   
If your principal
residence contained a home office or was otherwise used partially for business
purposes

2.   
If you sell vacant land
adjacent to your principal residence

3.   
If your principal
residence is owned by a trust

4.   
If you rented part of
your principal residence to tenants, or used it as a vacation or second home

5.   
If you owned your
principal residence jointly with an unmarried individual.


Note: Members of the
uniformed services, foreign services, and intelligence community, as well as
certain Peace Corps volunteers and employees may elect to suspend the running
of the two-out-of-five-year requirement during any period of qualified official
extended duty up to a maximum of ten years.

Consult a tax
professional for details.

This material was prepared by Broadridge Investor Communication
Solutions, Inc., and does not necessarily represent the views of The Retirement
Group or FSC Financial Corp. This information should not be construed as
investment advice. Neither the named Representatives nor Broker/Dealer gives
tax or legal advice. All information is believed to be from reliable sources;
however, we make no representation as to its completeness or accuracy. The
publisher is not engaged in rendering legal, accounting or other professional
services. If other expert assistance is needed, the reader is advised to engage
the services of a competent professional. Please consult your Financial Advisor
for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by
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America, Alcatel-Lucent or by your employer. We are an independent financial
advisory group that specializes in transition planning and lump sum
distribution. Please call our office at 800-900-5867 if you have additional
questions or need help in the retirement planning process.

The Retirement Group is
a Registered Investment Advisor not affiliated with  FSC Securities and
may be reached at www.theretirementgroup.com
.

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