Homeowners Tax Breaks
For the alert taxpayer, the family home can be a major source of tax savings. Federal tax law is studded with provisions that encourage and enhance home ownership, as opposed to other forms of investment.
BREAKS WHEN YOU BUY
Mortgage points. For borrowers other than homeowners, mortgage points (a prepayment of interest represented by a percentage of the loan) have to be capitalized and deducted over the life of the loan. However, points charged on money borrowed to buy a principal residence are fully deductible by homeowners in the year they are paid.
However, the points must be paid out of the homeowner’s own funds and not simply deducted by the lender from the loan proceeds in order for the deduction to be immediately deductible.
Warning: Pay the points by separate check. When negotiating a mortgage for a new house, make sure you tell the bank you intend to do this. If you do not tell them, they will automatically take the points out of the funding, and you will lose the big up-front tax deduction you are entitled to.
Bigger interest deductions. Deductions for personal interest are not deductible.
However, interest paid on mortgages on your primary residence and on one
second residence will be fully deductible up to a total of $1 million in
acquisition debt - to acquire, construct or improve a residence.
Homeowners are also permitted to obtain a home loan of
$100,000 using the house as equity loans for any purpose and still deduct the
For home mortgage interest to be fully deductible, new mortgages must not exceed the total of the cost of the residence plus the cost of any improvements.
THE GLORIES OF GIVING
Homeowners who take advantage of a technique known as deferred giving can get a large immediate income tax deduction that will produce cash flow now without giving up their right to live in the house.
Let us look at an example. The owners, a husband and wife, give what is called a remainder interest in their house to charity. This is the right the charity has to take over the house at the owners’ death. However, the owners reserve the right to live in the house until the survivor of them dies.
The owners get a current charitable deduction for the value of the charity’s interest. This is computed from IRS tables and depends on how long the charity is expected to wait before taking over the house.
JOINT PROPERTY OWNERSHIP
The tax law encourages a couple to own the family home in the name of the spouse most likely to die first. Statistically, that is the husband.
The unlimited marital deduction means that the first spouse to die can leave the house to the surviving spouse without incurring any tax at all upon death. Yet, the property will get a stepped up tax basis (its cost for tax purposes) to the fair market value at the date of death.
No estate tax will have to be paid on the appreciated value of the house. In addition, when the surviving spouse sells, since the house was inherited at the increased value, the income tax that will have to be paid will be reduced. If the house remains in joint ownership, the survivor’s tax on sale will be much higher.
A married couple can elect to exclude tax on home sale gains of up to $500,000 ($250,000 for singles or married couples filing separately). To qualify for the exclusion, a taxpayer must have owned and used the home as a principal residence for at least two of the five years before the sale. To the extent your taxable gain exceeds the threshold, your gain is taxed at no more than 20%.
As a general rule, the home sale exclusion may be used an unlimited number of times, but not more than once every two years.
Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
Copyright © 2017
Wink Tax Services / Wink Inc.