July 28, 2016
Your home may well be the best tax shelter you could possibly own. In addition to current income tax savings while you own your home, any gain you realize as the result of an increase in the value of your home will most likely be excluded from taxes. For those of you who are considering the purchase of a home, it might be helpful to know some of the tax-related benefits of home ownership.
First, you should know that home mortgage interest is deductible on your personal income tax returns. While there has been talk in the past about eliminating this deduction, the home mortgage interest deduction appears to be perfectly safe for now.
As a homeowner, you may deduct interest on debt you incur to build, acquire or substantially improve your principal residence. There is a limit on this deduction; but it rarely applies in this part of the country. You can fully deduct the interest on the first million dollars of home acquisition indebtedness.
Another, underutilized benefit of home ownership involves the home equity loan interest deduction. As a homeowner, you may deduct interest on any loan that is secured by your residence, subject to two limits.
First, your deduction is limited to interest on the amount of debt that does not exceed the equity in your home. For this purpose, “equity” means the difference between the fair market value of your home, less the amount of any other debts that are secured by your home.
Note that you may deduct interest on all kinds of debts, even car loans, so long as the lender secures the loan by recording a mortgage against your residence. You may think it risky business to secure loans with the equity in your home. For some people, it is. But for others who routinely make payments timely, the possibility of loss is pretty remote.
The second limit on home equity loan interest deductions restricts deductions to interest on not more than $100,000 of home equity loans. So, to the extent your home has equity, it is entirely feasible that you might convert the family’s auto loans to fully deductible “home equity” loans.
Note that the tax laws do not require that your home equity loan be used for the purchase or improvement of your home. On the contrary, you can use the loan proceeds for whatever purpose you choose.
Homeowners may also deduct real estate taxes on their home. These interest and tax deductions can make the cost of home ownership much less expensive. Consider this illustration: Assume that you are in the 28% income tax bracket. If you pay $1000 per month in interest and real estate taxes on your home, you will save $280 per month in federal income taxes.
That means your net payment is only $720, which may be much easier to handle than a $1,000 payment. The point is that you must take the tax savings into account when you compute the monthly home mortgage payment you can afford.
The law also allows you to exclude up to $500,000 of gain on the sale of your home if you are married, file a joint tax return, and the home was your principal residence for at least 2 of the 5 years preceding the sale. If you are unmarried or do not file a joint tax return, the maximum gain you can exclude is $250,000.
This exclusion is not a “once-in-a-lifetime” exclusion. It may be used again and again so long as you have not claimed the exclusion within two years preceding the sale date. There is no longer a requirement that you “buy up” to defer the tax on any home sale gain.
In conclusion, your home offers the benefit of current tax-relief through interest and real estate tax deductions. If offers additional tax relief if you sell it at a profit as your gain will be excluded from tax.
This tax season is an important one for many business owners because it’s the first that will be impacted by the Tax Cuts and Jobs Act (TCJA). How big of an impact is dependent on your unique situation. We’ve compiled this short list of provisions that may affect the business community:
According to Forbes.com, Super Bowl viewers traditionally load up on millions of pounds of less-than-healthy foods during the big game—including ribs, pulled pork, tortilla chips, nuts, popcorn and bacon—all washed down with beer (the Super Bowl beverage of choice). If you are trying to stick to your New Year’s resolution to eat better, consider a few healthy substitutes for the traditional Super Bowl eats:
The combination of running a business and your life and preparing for tax time can drive some people into a slight panic. But no need to get stressed if you are prepared. Now is the time to start organizing all documents required to file your tax return.