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The Tax Advantages of Home
Ownership
Did You Buy Your Home Last Year?
Deduct the Points: If you bought a home last year, you may deduct many of the
costs associated with your home loan or acquisition mortgage. Did your lender
quote an interest rate plus points for the loan? A point equals one percent of
the loan amount. Check your escrow closing statement for the amount of the loan
fee or points, that amount qualifies as an itemized deduction.
If you obtained a home improvement last year,
the points are also deductible. With either a purchase or home improvement
loan, you may have been charged a prorated interest amount for the month you
closed escrow. Check your closing statement for this deduction.
If you simply refinanced the loan on your home
or borrowed against other real property to take cash out or secure a lower
interest rate, the points or loan fees must be deducted annually over the life
of loan.
If you refinanced last year and forgot to
deduct the points, prorated interest, or loan fees, you can take the deductions
on this year's return.
Property Tax
If you bought property
last year, escrow would prorate the portion of property tax paid by the seller.
Your closing statement may reflect a property tax charge (deduction) from the
date you took title to the property. The seller would have received a
corresponding credit. However, if you agreed to pay the property tax owed by
the seller you could not claim that amount as a deduction but you could add it
to your basis. Supplemental property tax payments are deductible for the tax
year in which they are paid.
Prepayment Penalty
If you paid off
an existing real property loan last year and were charged a prepayment penalty,
that amount is tax deductible. Remember to deduct the interest amount if you
prepaid your January home loan payment at the end of the previous year. If you
assumed an existing loan, you may deduct any prorated interest is also
deductible for a primary residence that will be completed and occupied within
two years.
Did You Sell Your Home for a Profit Last
Year?
If it was your primary residence for two of the last five years,
up to $250,000 in profit is tax-free for single taxpayers. Married couples have
$500,000 in tax free gain from a qualifying home sale. The two-year occupancy
need not be continuous. Only one spouse need be on title but both must meet the
residency requirement.
Divorced or Separated Spouses
As a
general rule, no gain or loss is recognized or inter-spousal title transfers
during marriage or divorce. However, an exception is made in cases where the
spouses agree to delay the sale of their primary residence. For the welfare of
the children, a divorce decree may allow one spouse to reside in the home until
some time in the future when the property will be sold and the proceeds divided
equally. If the resident spouse qualifies for the $250,000 home sale exemption,
the non-resident spouse also qualifies for the $250,000 home sale
exemption.
Surviving Spouse
The window may
claim the $500,000 exemption if the home is sold during the year the spouse
died. If the surviving spouse inherits the deceased spouse's half of the
residence, the adjusted cost basis on the half is usually "stepped up" to
market value on the date of the surviving spouse's taxable gain upon sale. In
California as a community property state, the surviving spouse can usually
claim a new stepped-up basis on the home's entire market value, thus resulting
in little or no taxable sale profit.
House Partners
Unmarried co-owners
who sell their primary residence after two years may each claim the $250,000
exemption. Up to four co-owners can qualify and individually claim the
exemption for a million dollars tax-free.
Personal Residence Exemption
As long
as the taxpayer meets the two year residency requirement for each sale, the
individual $250,000 and the married $500,000 tax exemptions can be claimed
every two years.
Did You Change Jobs and Relocate?
A
homeowner or renter can deduct almost all of their moving costs if your new job
location is at least 50 miles further from your old home than your previous
job. The second requirement is that you work at least 39 weeks in the vicinity
of your new job location, 78 weeks for self-employed persons. You do not need
to itemize deductions to take advantage of the moving cost tax adjustment if
your situation qualifies. The distance from your new job is not a consideration
What is Your Basis?
Basis is your
starting point for figuring a gain or loss if you later sell your home, or for
figuring depreciation if you later use part of your home for business purposes
or for rent. While you own your home, you may add certain items to your basis.
You may subtract certain other items from your basis. These items are called
adjustments to basis.
Figuring Your Basis
How you figure
your basis depends on how you acquire your home. If you buy or build your home,
your cost is your basis. If you receive your home as a gift, your basis of the
person is usually the same as the adjusted basis of the person who gave you the
property. If you inherit your home from a decedent, the fair market value at
the date of the decedent's death is generally your basis.
Fair Market Value
Fair market value
is the price that property would sell for on the open market. It is the price
that would be agreed on between a willing buyer and a willing seller, with
neither having to buy or sell, and both having reasonable knowledge of the
relevant facts.
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