subject: LET'S TALK TAX STILL The Best Tax Shelter Around — Your Personal Residence! [print this page] With today's economy many homeowners are struggling to make ends meet. If you're a homeowner, perhaps you identify with the above. But, home ownership is still one of the best investments that can be made. In fact, Uncle Sam has thrown you a tax shelter that's beyond compare. You may deduct the mortgage interest paid on your loan and deduct the property taxes paid to the State. These deductions are based on being able to itemize your deductions on your tax return.
If you don't currently own a home, this tax benefit is significant enough to make you look seriously at home ownership. There are of course, exceptions to every deduction. One of the complexities of home ownership tax deductions surrounds points.
Are "Points" Deductible?
Points are one type of fee paid at closing to your lender. If you pay points when you buy your new home, these may be deducted in full in the year of purchase. However, if you refinance your loan, the points must then be deducted over the life of the new loan. In the event you are deducting points annually and then decide to refinance again, you will be able to deduct the balance of the points when you pay off the old mortgage.
There are some limitations:
Points must not be more than amounts generally charged in your area.
Funds provided at closing must be at least equal to the points.
Loan must be used to buy or build taxpayer's main home.
Points are stated as a percentage of the principal amount of loan.
Points are clearly stated on the settlement statement as charged for the mortgage.
Limits on your Mortgage Interest Deduction
Predictably, there are limits on mortgage interest deduction. Only the interest on the first $1 million of home acquisition debt is deductible. (Acquisition debt is defined as debt to purchase, build or substantially improve the residence.) Home equity debt limits are the lesser of the fair market value of the home reduced by the acquisition debt or $100,000 ($50,000 if married filing separately).
Homeownership's Greatest Tax Advantage
Probably the greatest advantage of home ownership occurs when you decide to sell your home. If you have owned and lived in your personal residence for two out of five years, you can sell the home and not be taxed on a profit up to $250,000 for singles and $500,000 for couples. This rule seems very straight forward and simple but beware, there are a number of exceptions.
Job related moveif you have to move out of your area (a 50-mile radius), and are unable to meet the two year time period, you can prorate the time based on a formula utilizing a ratio consisting of the number of days that you owned and lived in the home to the total number of days in the relevant 24-month period (approximately 730), multiplied by the exclusion amount.
Health problems requiring a saleif health problems force you to move from your principal residence, you can prorate the time and exclusion based on the formula above.
Ideally, a couple that kept good records of time of ownership could buy and live in a home for two years, sell for a profit and then repeat this process. Still, there are a number of pitfalls that cause tax problems, such as the special rules surrounding home offices and move out/rent/return situations that effect the two in five requirement (this involves adjusting for depreciation recapture). Given the many regulations and nuances of the tax laws, many people opt to hire a licensed tax practitioner, such as an enrolled agent.
When you consider the possible profit from selling a home, and the tax advantages that the government makes available to you, homeownership is still one of the best investments that you can make.
LET'S TALK TAX STILL The Best Tax Shelter Around Your Personal Residence!
By: Sue Graff
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