Every time I meet with a potential Pasadena home buyer, a question comes up about tax benefits of home ownership. In this post, I'll cover some of the tax incentives that are currently available. These tax incentives are a nice little bonus that is allowed by the IRS to add on to the satisfaction and enjoyment of being a homeowner.
Interest paid on the primary residence and a second or vacation home is deductible from one's income tax. Since the vast majority of the early years' mortgage payment is interest, this can be a substantial deduction, saving the homeowner thousands of dollars in Federal and State income taxes. This is often the largest single itemized deduction the taxpayer has.
Real estate property taxes are deductible on the primary residence and a second or vacation home. That portion of the homeowner's monthly mortgage payment which goes toward the payment of real estate taxes may be deducted from federal income taxes. In the early years of a mortgage, as much as 95% of the payment goes toward interest and taxes, making as much as 95% of the total house payment tax deductible.
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INCREASE IN TAKE HOME PAY:
IRS codes allow individuals who already exceed the minimum standard tax deduction barriers to claim additional tax withholding allowances or exemptions when they purchase homes of greater value or second/vacation homes. This increase in W-4 exemptions allows the homeowner to receive $30-600 per month in additional take home pay from their employer. It may assist them in budgeting a home of greater value or a second home. This monthly increase in take home pay is in lieu of a large lump sum income tax refund. This little known tax law may also be used by first time purchasers, if they purchase a home which will allow them to itemize substantially more than the minimum standard deduction amount.
Moving expenses may be tax deductible if you are moving more than 50 miles from your present location. The actual moving expenses plus cost of the trips for job hunting and some other expenses associated with moving may be deductible.
HOME OFFICE USE:
Part or full time use of an office in your home may be tax deductible. Under IRS rules, a prorated portion of the housing expense, operating expenses and depreciation may be deducted from income taxes if you use a portion of your home as an office, and you meet certain guidelines.
CAPITAL GAINS EXCLUSIONS:
A homeowner may sell his principal residence and exclude up to $250,000 of profits under a capital gains exclusion. A married couple may exclude up to $500,000 in profits, each time they meet the eligibility requirements, but not more than every two years. To be eligible for this capital gain exclusion, the homeowner must have owned and occupied the home as a primary residence for at least two of the five years prior to the sale.
REAL ESTATE INVESTORS:
Active real estate investors who actively participate in the management of rental properties can deduct up to $25,000 per year for deprecation, negative cash flows, interest, taxes, maintenance, repairs and miscellaneous costs, as long as their adjusted gross incomes do not exceed $100,000. $1,000 of the $25,000 deduction is eliminated for every $2,000 over the $100,000 adjusted gross income, until the AGI reaches $150,000.
No deductions are available for the 3-5% of taxpayers whose adjusted gross income exceeds $150,000. - However, the $25,000 tax deduction is a huge deduction and would be over and above the deductions for one's primary residence and second home. This $25,000 tax deduction could conceivably reduce a gross income of $50,000 to a taxable income of only $25,000, resulting in a substantial tax savings. The tax savings would even be greater in states having state income taxes, as state income taxes are usually based on Federal income taxes, which would be lowered.
Information courtesy of Jeff Elias.
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