Income Tax Implications
of Home Ownership
Owning a home can
provide financial and income tax benefits as well as emotional satisfaction.
While a home is usually viewed as shelter and a place to live, over the
past few decades many homeowners have seen the value of their homes rise
significantly and have reaped the gains when they sold their homes. Since
most homeowners use mortgages to finance a portion of the cost of the
home, the gains were leveraged even more. But, remember that home values
do not always rise.
Income tax benefits
The income tax laws provide special breaks for homeowners. These breaks
are in the form of tax deductions for mortgage interest and property taxes
and preferential treatment of gains when the home is sold. As always,
you may want to consult with your tax advisor to get a complete understanding
of how tax laws may apply to your situation.
Benefits from deductions
Many taxpayers find that the interest on their mortgage and the annual
property taxes they pay are large enough to enable them to itemize their
deductions instead of using what is commonly referred to as the "standard
deduction." However, beginning in 2018, the deductions for some mortgage
interest and state and local taxes are limited. The "standard deduction"
for single filers on their 2018 tax returns is $12,000 and $24,000 for
joint filers. For many homeowners, the deductions allowed for their interest
and property taxes exceed those amounts.
Be sure to keep track
of when you pay your property taxes. Some areas have due dates close to
the end of the year and you must have paid the tax before December 31st
to get the deduction.
Another way some homeowners
are able to get additional deductions is through the use of home equity
loans. Since the interest paid on a home equity loan qualifies as a deduction,
you may want to consider a home equity loan as a source of funds to pay
off credit card debt, where the interest is not deductible. In addition,
the interest rate will probably be lower.
Benefits on the
sale of your home
For many years, the tax laws only allowed you to avoid paying capital
gains taxes when selling your home if you rolled over the proceeds into
a home that was more expensive. There were also some rules that allowed
individuals over the age of 55 to avoid some taxes.
In 1997, those rules
were changed. Now the law generally allows a married couple filing a joint
tax return to exclude up to $500,000 of gains on the sale of their home.
For single return filers the limit is $250,000. You must have lived in
the home as your principle residence for at least two of the five years
before the sale. You can claim this benefit every two years. There are
some special rules if you do not meet that requirement for job changes
or health reasons. Consult your tax advisor for more details.
The tax benefits of home ownership can be significant. Be sure to keep
good records about the purchase price and any improvements you make to
the home. Pay attention to when you make property tax and mortgage payments
to ensure they fall into the year you want to take them as itemized deductions.
Finally, if you have special circumstances (including a potential large
gain if selling your home), be sure to get expert advice to make sure
you get the maximum benefits you are allowed under the tax laws.