 |
|
|
|
|
|
 |
|
|
|
|
|
|
|
|
Tax Benefits of Home OwnershipTax BenefitsIt's Tax Time yet again and the California Association of REALTORS® (C.A.R.) decided to take a closer look at the benefits that go along with homeownership with respect to the consumption and tax benefits. We dived into the tax benefits of homeownership, as well as other of benefits being homeowners. Let¿s take a look how this affects homeowners this tax season.
In the midst of tax season, homeownership reaps well-established tax benefits. Homeowners not only enjoy a roof over their heads, they have a long-term nest egg investment and are able to save on their taxes because of it. Because of the Mortgage Interest Deduction (MID) portion of the Federal tax law, homeowners are allowed to reduce their taxable income by a sizable amount. But how much do homeowners actually save? By how much more do they save in taxes over their renting counterparts?
In the last several years, we have seen homeowner¿s equity gains¿in other words, ¿return-on-investment¿¿rise steadily with an average return of over 20 percent per year because of record increases in home prices. Make that comparison with your stock portfolios or even your 401k performance, and real estate has offered quite a good return on your investment.
Yet along with home equity gains and overall appreciation, there are other huge tax advantages to owning your own home¿interest & property tax deductions. For example, a homeowner who has purchased a home at the median price in 2005 would have paid $524,020 for that home. With property taxes at the going rate of about 1 percent of the property value, the property tax deduction for that home would be approximately $5,240 a year. In the first 12 months the interest paid on that home loan would total $24,470 (Interest calculated assuming a 20% downpayment with 5.87 percent fixed-rate mortgage ¿ Freddie Mac). Therefore, that homeowner¿s total MID and property tax deduction for the first year of homeownership would be $29,700. If the owner falls in the marginal 25 percent tax bracket, the total tax savings in the first year of owning the home would be around $7,430 ($29,700 interest paid & property taxes multiplied by the 25 percent marginal tax bracket). The IRS allows the homeowner to deduct the entire amount of interest paid on a home loan up to $1,000,000 ($500,000 if married filing separately) as long as the owner includes Schedule A on IRS 1040, the loan is in the owner¿s name, and the mortgage is secured by collateral (usually the home itself¿IRS Publication 936). The long-run tax savings would be over $36,000 if the homeowner holds onto that home for five years (assuming no change in the tax bracket).
Put differently, the current tax system helps homeowners because it makes homeownership more affordable. For example let¿s take a look at two different households. One is a first-time buying household who bought their home during 2005 for $445,400 (assuming 85 percent of the median price in California for 2005). After accounting for mortgage interest and property tax deductions, their taxable income would be $87,150. Assuming these new homeowners had no other deductions their total taxes owed to the IRS would be approximately $15,120 (for married filing jointly). Now let¿s look at a renting household with the same earnings and marital status. Its taxable income would be $105,000, higher than that of the buyer because they do not have any mortgage interest or property taxes to deduct (assuming the standard deduction for 2005 of $10,000). Under these same assumptions (holding all else constant), the renter household pays approximately $19,580 in taxes. Because of the interest and property tax deduction, homeowners are able to reduce their taxable income and achieve almost $4,500 in tax savings.
As we have seen, homeownership reaps tax benefits. Yet, homeownership has benefits beyond the checkbook or 1040 forms. High and stable homeownership rates contribute many important social benefits by boosting the quality of living areas such as education and civic involvement while lowering the crime rate and welfare dependency. (Source: NAR¿s Social Benefits of Homeownership and Stable Housing). As homeowners, you not only reap the many advantages when tax season comes around, but also bask in the social benefits homeownership brings to your community.What's the best tax break available to Jane and John Q. Public? If they're homeowners, it's selling their house.
Homeowners already know the many tax breaks that Uncle Sam offers, most notably mortgage interest and property tax deductions. Well, he also has good tax news for home sellers: Most of them won't owe the Internal Revenue Service a single dime.
When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes.
"Most people are not going to have a tax obligation unless their gain is huge," says Bob Trinz, a senior tax analyst at RIA, which provides tax information and software to tax professionals.
Some sellers are surprised by this break, especially if they've been in their homes for a while. That's because before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within two years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was tax paperwork (Form 2119) to fill out to show that you followed the rules.
But when the Taxpayer Relief Act of 1997 became law, the home-sale tax burden eased for millions of residential taxpayers. The rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts.
"There is some logic to this law change because most people under the prior rules didn't recognize a taxable gain because they rolled it over into another residence," says Trinz. "The change essentially makes it easier to dispose of your residence."
Still some requirements to meet
If you used pre-1997 rules for residential sales, don't worry. That doesn't disqualify you from claiming the exclusion on any residential sales now. The law change applies to all sales since it took effect.
Another bonus of the new rules: You don't have to buy another home with your sale proceeds. You can use the money to travel to Europe in style, buy an RV and drive across the country or get all those designer shoes you never could afford before.
Even better, there's no limit on the number of times you can use the home-sale exemption. In most cases, you can make tax-free profits of $250,000 (or $500,000 depending on your filing status) every time you sell a home.
Ah, but we are talking taxes here. You did notice that phrase "in most cases," didn't you? Before you put a "For Sale" sign in the yard, you need to make sure your house-sale situation is one of those "most cases."
First, the property you're selling must be your principal residence. That means you live in it. This tax break doesn't apply to a house or other property that you have solely for investment purposes. In those cases, the usual capital gains rules apply.
You can, however, turn a rental house into your primary residence, making the sale of it eligible for the exclusion. This is accomplished when you meet the IRS use and ownership tests: You own and live in the home for two out of the five years before the sale.
What's the best tax break available to Jane and John Q. Public? If they're homeowners, it's selling their house.
Homeowners already know the many tax breaks that Uncle Sam offers, most notably mortgage interest and property tax deductions. Well, he also has good tax news for home sellers: Most of them won't owe the Internal Revenue Service a single dime.
When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes.
"Most people are not going to have a tax obligation unless their gain is huge," says Bob Trinz, a senior tax analyst at RIA, which provides tax information and software to tax professionals.
Some sellers are surprised by this break, especially if they've been in their homes for a while. That's because before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within two years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was tax paperwork (Form 2119) to fill out to show that you followed the rules.
But when the Taxpayer Relief Act of 1997 became law, the home-sale tax burden eased for millions of residential taxpayers. The rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts.
"There is some logic to this law change because most people under the prior rules didn't recognize a taxable gain because they rolled it over into another residence," says Trinz. "The change essentially makes it easier to dispose of your residence."
Still some requirements to meet
If you used pre-1997 rules for residential sales, don't worry. That doesn't disqualify you from claiming the exclusion on any residential sales now. The law change applies to all sales since it took effect.
Another bonus of the new rules: You don't have to buy another home with your sale proceeds. You can use the money to travel to Europe in style, buy an RV and drive across the country or get all those designer shoes you never could afford before.
Even better, there's no limit on the number of times you can use the home-sale exemption. In most cases, you can make tax-free profits of $250,000 (or $500,000 depending on your filing status) every time you sell a home.
Ah, but we are talking taxes here. You did notice that phrase "in most cases," didn't you? Before you put a "For Sale" sign in the yard, you need to make sure your house-sale situation is one of those "most cases."
First, the property you're selling must be your principal residence. That means you live in it. This tax break doesn't apply to a house or other property that you have solely for investment purposes. In those cases, the usual capital gains rules apply.
You can, however, turn a rental house into your primary residence, making the sale of it eligible for the exclusion. This is accomplished when you meet the IRS use and ownership tests: You own and live in the home for two out of the five years before the sale. See additional...
What's the best tax break available to Jane and John Q. Public? If they're homeowners, it's selling their house.
Homeowners already know the many tax breaks that Uncle Sam offers, most notably mortgage interest and property tax deductions. Well, he also has good tax news for home sellers: Most of them won't owe the Internal Revenue Service a single dime.
When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes.
"Most people are not going to have a tax obligation unless their gain is huge," says Bob Trinz, a senior tax analyst at RIA, which provides tax information and software to tax professionals.
Some sellers are surprised by this break, especially if they've been in their homes for a while. That's because before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within two years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was tax paperwork (Form 2119) to fill out to show that you followed the rules.
But when the Taxpayer Relief Act of 1997 became law, the home-sale tax burden eased for millions of residential taxpayers. The rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts.
"There is some logic to this law change because most people under the prior rules didn't recognize a taxable gain because they rolled it over into another residence," says Trinz. "The change essentially makes it easier to dispose of your residence."
Still some requirements to meet
If you used pre-1997 rules for residential sales, don't worry. That doesn't disqualify you from claiming the exclusion on any residential sales now. The law change applies to all sales since it took effect.
Another bonus of the new rules: You don't have to buy another home with your sale proceeds. You can use the money to travel to Europe in style, buy an RV and drive across the country or get all those designer shoes you never could afford before.
Even better, there's no limit on the number of times you can use the home-sale exemption. In most cases, you can make tax-free profits of $250,000 (or $500,000 depending on your filing status) every time you sell a home.
Ah, but we are talking taxes here. You did notice that phrase "in most cases," didn't you? Before you put a "For Sale" sign in the yard, you need to make sure your house-sale situation is one of those "most cases."
First, the property you're selling must be your principal residence. That means you live in it. This tax break doesn't apply to a house or other property that you have solely for investment purposes. In those cases, the usual capital gains rules apply.
You can, however, turn a rental house into your primary residence, making the sale of it eligible for the exclusion. This is accomplished when you meet the IRS use and ownership tests: You own and live in the home for two out of the five years before the sale.
Client Testimonials contact us  featured property listings search for homes 1031 Tax Deferred Exchanges Tax Aspects of Home Ownership 10 Questions To Ask Before You Hire an Agent school info School Test Results (Star Testing) Livermore School District San Ramon School District Pleasanton School District Fremont School District 1st Time Buyer Financing Transfer of Property Tax 55 & Older Investing Your IRA in Real Estate How to Buy at Last Year's Low Interest Rates! Mortgage Questions? Out of State Investing for Cash Flow How to Sell a House That Didn't Sell! open houses find your home's value free reports mortgage calculator  Livermore Wineries Scottsdale Az. Properties main page pre-qualify now! Kathleen Waelde CRS, GRI, Broker-Assoc. Ph. 800 868-2070
Phone
E-Mail Us
(925) 373-2291 Fax (925) 456-3336 Mobile (925) 216-5108 Coldwell Banker
2470 First St. #204
Livermore, CA 94550
|
|
