Tax Benefits of Home Ownership
Charlene M. Ives, CPA, PC
Saturday April 01, 2006
Mortgage interest
Deductible mortgage interest includes both the debt incurred to purchase a home, and other home equity debt such as lines of credit, as long as the debt is collateralized by a residence. Deductible interest is that paid for a primary residence, and one other residence. Points paid by a purchaser (and in come cases seller-paid points) are also deductible, except points paid on a refinancing transaction, which usually have to deducted over the life of the loan.
Caveat: If your mortgage debt exceeds the fair market value of the home, your mortgage interest deduction is not 100% deductible. Also, if your total mortgage is higher than certain limits, your interest deduction may not be 100% deductible.
Real estate taxes
Real estate taxes are deductible, both for residences and investment properties. When you buy a home, be careful of the allocation of real estate taxes on your closing statement. It is easy to miss a tax deduction in this area.
Sale of a residence
Many people are still thinking in terms of "old rules" for sale of a residence, which stated that you had to reinvest the proceeds, etc. in order to get gain exclusion on the sale. These rules are gone. The new rules are actually much more favorable, stipulating ownership and use tests which when met, provide a generous $250,000 per taxpayer exclusion of gain. It is well worth doing to plan ahead, timing your purchase or sale of your residence to qualify for the full or partial gain exclusion.
Business Use of a Home
Final regulations issued by the IRS in December 2002 give us welcome relief when we sell a residence that has been used for business. When a residence is used for business (one that qualifies for the home office deduction), treatment of gain on the business portion of the property is now more favorable. Under the new rules, if the home office is a separate structure, the residence gain exclusion applies only to the residence part of the property, however, if the home office is not a separate structure, the gain exclusion applies to the entire property (we still pay gain attributable to depreciation taken on the structure). Prior law disallowed the gain exclusion on the business part of the property. For more information on the gain exclusion, see article "How to Preserve the Residence Gain Exclusion".
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