Tax season is upon us. Many people have questions when it comes to homeownership and the tax considerations that come with it. Your accountant can help you answer these questions, but here is some basic information about homeownership and taxes.
Property taxes are paid by most homeowners in the US for the privilege of owning a home. On average, property taxes amount to 1.5% of the property’s current market value. Property taxes are determined by county or city authorities to help pay for public services and are calculated using a variety of formulas.
Property taxes are fully deductible against current income taxes.
Mortgage Interest Deduction
The mortgage interest deduction is one of the most important tax benefits homeowners have. Homeowners can deduct the interest paid on mortgage loans to help buy, build, or improve a primary residence and/or second home.
The mortgage interest deduction entitles you to deduct the interest on your home loan for the year in which you paid for it. While mortgage interest reduces your taxable income, it is not a dollar-for-dollar tax cut.
The amount of interest on your mortgage decreases each year, so making principle reductions every year can help you pay off your loan early.
When buying a new home, the borrower is generally required to pay interest from the closing date until the first of the following month. Verify whether or not that charge is included in the year-end statement.
To use this deduction, you need to itemize, and your total deductions need to exceed the IRS’s standard deduction.
When you sell your home, you can keep, tax free, capital gains up to $500,000 for a married couple or up to $250,000 for individuals in profit from the sale. To qualify, you must have lived in the home as your primary residence for at least two of the prior five years. This is not a one-time tax exclusion. It can be used as often as you meet the qualifications. Some exceptions do apply.
Homeowners should always keep all receipts of permanent home improvements and information on all mortgage closing costs. If you end up in a situation where you have to pay capital gains taxes, these costs can be added to your adjusted cost basis. Cost basis is a tax term for the dollar amount assigned to a property at the time it is acquired, for the purpose of determining gain or loss when it is sold.
Any money spent on permanent home improvements can be added into the home’s cost basis, which reduces capital gains when the home is sold.
Home Acquisition Costs
Points paid by the buyer or seller to purchase a home are deductible for that year. Closing costs aren’t immediately tax deductible, but they can be figured into the adjusted cost basis when you sell your home. These fees include title insurance, loan application fees, credit report fees, appraisal fees, services fees, closing costs, document preparation costs, and recording fees.
If you have questions regarding homeownership feel free to contact us. You can also find out more about taxes by contacting the IRS 1-800-TAX-1040.