Big Tax Breaks for Homeowners
There are many issues to consider when purchasing real estate… price, location, condition, etc. Often times, one of the last things on that list are the tax implications. Remember, when you are renting, you cannot deduct the rent on your federal tax return. Homeowners are eligible for a big tax break. Once you take out a mortgage on your home, you are eligible to deduct the mortgage interest you pay—up to $1 million. The IRS allows taxpayers having certain types of expenses to itemize them on the tax return, rather than claiming the standard deduction. Mortgage interest is one of the special expenses that qualify you to itemize. For 2006 the standard deduction is $5,150 for a single taxpayer and $10,300 for married filing jointly. Since most of your mortgage payment is interest for many years, you are able to claim most of your mortgage payment as an itemized deduction.
Once you qualify to itemize your deductions, many other writeoffs become available to you that you didn’t have before. State and local taxes paid—including real estate taxes and state income tax withheld from your paycheck—also qualify as itemized deductions. You can also write off charitable contributions, business expenses, and medical expenses if you qualify.
A word of caution to higher income taxpayers—some itemized deductions may trigger AMT, or Alternative Minimum Tax. The rules for AMT are complex. Consult with a qualified tax professional in order to be sure you get the breaks available to you and avoid traps for the unwary.
Avoid Capital Gains Taxes
Normally, you must pay capital gains taxes when you sell investments. The tax code provides big breaks when you sell your primary residence. As long as your home is your principal residence for 2 out of the last 5 years before you sell it, you can exclude $250,000 of gain (single) up to $500,000 (married). Even if you haven’t lived in the home for 2 years, you may qualify for a reduced exclusion. Your tax professional can help you navigate the rules and get the lowest tax allowable.
Congratulations, you made a great decision
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, be sure to get expert advice to make sure you get the maximum benefits you are allowed under the tax laws.
More Information
Dena Lebowitz, EA, MST-Principal
Dena is an experienced tax professional, who works with both individuals and businesses. She has earned her Masters in Taxation and is a Graduate Fellow of the National Tax Practice Institute. Dena taught several courses at Northeastern University's Graduate School of Professional Accounting and is a regular presenter at the annual 1040 update class given by the Massachusetts Society of Enrolled Agents.
An Enrolled Agent (EA) has demonstrated technical competence in the field of taxation to the IRS and is a tax professional. An EA is licensed by the U.S. Department of Treasury to represent any taxpayer (individuals, businesses, corporations, estates) before the Internal Revenue Service.
