Tax Season and Real Estate
By James Vaughn
Whether you are a homeowner or looking to buy a home, tax season can have a profound impact on your bottom line. The real estate market tends to take a short dip around tax time in April as would-be sellers shift their focus to the impending deadline, although this year we are seeing that time frame pushed out one month due to the extended IRS deadline until May 17. While those in the real estate market should always seek out a certified tax professional for guidance, we will go over some of the basics here to help you get the conversation started.
1) Federal Taxes and your Mortgage
It is possible to deduct interest paid on a mortgage throughout the year from your Federal taxes. This deduction does not apply to the entire monthly mortgage payment, which also typically included principal on the loan and homeowner’s insurance, but only the interest portion. Private Mortgage Insurance (PMI) can also be deducted in certain circumstances. The deduction does not equate to cash back on your taxes, but rather reduces the amount of income you would otherwise pay taxes on by the amount of interest paid. However, this deduction only makes sense if, when added with other potential itemized deductions, the total amount for the year exceeds the Standard Deduction ($12,000 for single filers, and $24,000 for married).
2) Taxes and Home Sellers
While many looking to sell their home once feared high taxes on any profit stemming from the sale, the law has recently changed to benefit most people looking to sell their home. If a homeowner lived in the house for 2 of the last 5 years, then up to $250,000 of the profit is tax-free and not reportable to the IRS ($500,000 for couples). After that amount, though, capital gain taxes do kick in. If the home is sold for a loss, unfortunately the loss does not count as a tax write-off. Make sure to keep documentation (usually receipts) from any major improvements or upgrades that are made to the property, as these costs can often offset some of the gains from the sale for tax purposes.
3) Taxes and Home Buyers
Home buyers should be aware of the potential tax benefits from owning a home and factor them into their assessment about whether to purchase. If a potential buyer currently rents and expects their monthly housing costs to increase once they purchase a home, then the investment may not be worth it in the short term, particularly if they would still otherwise use the Standard Deduction. However, many programs also exist that provide first time home buyers with various tax incentives. If a potential buyer manages a business, they could also potentially see tax benefits if they are able to use their home for the business.
4) Taxes for Investors Looking to Purchase a Second Property
Rental properties generally have more tax considerations than primary residences. Usually, there are more expenses that can be deducted from rental income, including maintenance costs and utilities. Rental owners can also deduct depreciation on the physical property (does not include the value of the land) over a period of of 27.5 years. In other words, if the purchase price of the physical property (like the home) is $275,000, then each year the depreciation deduction is $10,000. Many rental owners find that they are able to claim a loss due to the amount of the depreciation deduction.
Whether you are a home buyer, seller, or simply considering your next move, The Sands & Associates team is always ready to help navigate a complex transaction. We can also provide assistance in locating the best tax professional to answer all of your detailed questions about real estate and taxes.