Another Benefit Of Homeownership
One of the most appealing advantages of being a homeowner is the tax incentives offered. Even though some tax considerations are basic and fairly well known, the topic remains complex and extremely detailed. It is not our intent to answer all of your tax questions on this web page, but rather to highlight some key tax considerations you may not be aware of and provide some general tax information to you as a home buyer or seller. We encourage you to consult with your accountant, a tax counselor or the local IRS office regarding specific tax guidelines and rules. Some of the information used for this page are compliments of IRS publication #521 and #523.
Here are what we consider being some of the significant tax tips for today’s homeowner:
The Gain Exclusion: Selling your home and moving into a smaller one is seldom an easy decision, but at least part of the decision-making process is a little easier in light of exclusions that eliminate most people’s federal tax liability on gain from the sale or exchange of their home.
Under these rules, up to $250,000 of the gain from the sale of a single person’s principal residence is tax-free. For certain married couples filing a joint return, the maximum amount of tax-free gain doubles to $500,000.
Like most tax breaks, however, the exclusion has a detailed set of rules for qualification. Besides the $250,000/ $500,000 dollar limitation, the seller must have owned and used the home as his or her principal residence for at least two years out of the five years before the sale or exchange. In most cases, sellers can only take advantage of the provision once during a two year period.
However, a reduced exclusion is available if the sale occurred because of a change in place of employment, health, or other unforeseen circumstances where the taxpayer fails to meet the two-year ownership and use requirements or has already used the exclusion for the sale of a principal residence in the past two years. Unforeseen circumstances that are eligible for the reduced exclusion include involuntary conversions, certain disasters or acts of war or terrorist attacks, death, cessation of employment, change of employment resulting in the taxpayers inability to pay certain costs, divorce or legal separation, multiple births from the same pregnancy, and events identified by IRS as unforeseen circumstances (for example, the September 11 terrorist attacks). The amount of the reduced exclusion equals a fraction of the $250,000/$500,000 dollar limitation. The fraction is based on the portion of the two-year period in which the seller satisfies the ownership and use requirements.
These rules can complicate if you would marry someone who would use the exclusion provision, if the residence would be part of a divorce settlement, if you inherit the residence from your spouse, if you would sell a remainder interest in your home, if there would be periods after 2008 in which the residence is not used as your (or your spouse’s) principal residence, or if you would take depreciation deductions on the residence. Also, the exclusion does not apply if you acquired the residence within the previous five years in a “like-kind” exchange in which gain was not recognized.
If you meet the above criteria, you may qualify for many deductible-moving expenses. Here are a few examples:
- Travel expenses and lodging incurred during house hunting and the actual move meals are not included
- Cost of packing creating in transporting your household goods and personal items cost of connecting or disconnecting utilities temporary living expenses incurred while staying in the area of your new home
- There are other moving expenses you may take advantage of if you qualify. For a copy of IRS publication “Moving Expenses”, find it online at: https://www.cpapracticeadvisor.com/2022/05/12/new-tax-twists-and-turns-for-moving-expense-deductions/49436/
Home Ownership Deductions
As an added incentive to prospective homeowners, the government allows you to deduct interest paid on a mortgage, loan fees (points) and property taxes. Our government demonstrates it understands both the economic and social benefits by encouraging home ownership in this fashion,
Improvements vs. Repairs
Improvements increase your investment in the property for tax purposes by adding to the value of your home, prolonging its useful life or adapting it to new uses. Improvement should not be confused with repairs. Repairs do not add value; they maintain your home in good condition. Improvement examples are; adding a bathroom or bedroom, putting up a fence and paving the driveway. Repair examples are fixing gutters or floors and plastering cracks. Check out IRS Brochure 523 “Selling Your Home” by clicking here for more information on improvements that will qualify against your basis in your home.
As with all tax issues, you should keep efficient, well-organized records of transactions. You should save receipts and other records for all purchases, sales, improvements, additions and other items that affect your investment. According to the IRS, you should keep records “as long as they are material for tax purposes”. Usually home sellers should maintain records permanently in order to justify past gains and how they were calculated.
Your real estate agent may be able to offer further information on your individual tax needs. We stress once again that you talk with a professional who is very familiar with the current details and guidelines involved in the tax system is it relates to home ownership. After reviewing this preliminary information, you may be encouraged to investigate further. It is a subject worth looking into.
Ask if you have questions. I will do my best to answer you.