What are the Annual Tax Benefits of Home Ownership There are several tax advantages to home ownership that will likely reduce both your federal and state income tax liability. You should consult a tax advisor or CPA to determine the details of these tax advantages for your particular situation. However, the following are items you can deduct from your taxable income by listing these as itemized deductions on both your federal and state income tax returns. - Annual Mortgage Interest Charges This includes first and second mortgages, home equity loans and refinanced loans on your home.
- Other Itemized Deductions Once you own a home and can take itemized deductions on your tax return, other deductions such as state income tax, medical expenses, charitable contributions, vehicle registration and un-reimbursed employee expenses are deductible within limits.
- Property Tax This is the annual property tax paid on your home.
- Points Reported to You on Form 1098 The points a lender charged you for a mortgage that are reported on Form 1098 (a form the IRS requires lenders to send you detailing interest and points paid in a taxable year) are deductible in the year reported.
- Points Not Reported on Form 1098 All the points you paid for a mortgage are shown on your settlement statement. Those points you paid only to borrow money are generally deductible over the life of the loan. Only the points reported on Form 1098 are deductible in the year incurred.
What are the Tax Consequences When You Sell Your Home? In 1997, there was a major change in the federal tax laws that provides home owners a significant benefit when they sell their home. See IRS Publication 17, Chapter 16 for the complete details of the changes. In summary, the changes are as follows: - For the Sale or Exchange of a Principal Residence You can generally exclude from gross income up to $250,000 of gain (or $500,000 for married couples filing a joint return). This is not a one-time exclusion as the old law was for people over 55 years of age. You can re-use this exclusion repeatedly as long as you meet the ownership and occupancy requirements in the next term.
- To Exclude the Gain You generally must have owned and used the property as your main home for at least two years during the last five year period ending the date of the sale.
- Reduced Exclusion If you owned and lived in the property as your main home for less that two years, you may be able to claim a reduced exclusion.
- You Cannot Deduct a Loss on the sale of a Personal Residence This is considered by the IRS as a personal loss.
You should seek professional advice from your tax advisor or CPA before selling your home to ensure your transaction meets the IRS code. The tax code does change from time to time and a tax advisor or CPA can keep you informed of any changes.
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