Owning a home can provide financial and income tax benefits as well as
emotional satisfaction. While a home is usually viewed as shelter and a place
to live, over the past few decades many homeowners have seen the value of
their homes rise significantly and have reaped the gains when they sold their
homes. Since most homeowners use mortgages to finance a portion of the cost
of the home, the gains were leveraged even more. But, remember that home
values do not always rise.
Income tax benefits
The income tax laws provide special breaks for homeowners. These breaks are
in the form of tax deductions for mortgage interest and property taxes and
preferential treatment of gains when the home is sold. As always, you may
want to consult with your tax advisor to get a complete understanding of how
tax laws may apply to your situation.
Benefits from deductions
Many taxpayers find that the interest on their mortgage and the annual
property taxes they pay are large enough to enable them to itemize their
deductions instead of using what is commonly referred to as the
"standard deduction." The "standard deduction" for single
filers on their 2004 tax returns was $4,850 and $9700 for joint filers. For
many homeowners, their interest and property taxes exceed those amounts.
Be sure to keep track of when you pay your property taxes. Some areas have
due dates close to the end of the year and you must have paid the tax before
December 31st to get the deduction.
Another way some homeowners are able to get additional deductions is
through the use of Home Equity Loans. Since the interest paid on a home
equity loan qualifies as a deduction, you may want to consider a home equity
loan as a source of funds to pay off credit card debt where the interest is
not deductible. In addition, the interest rate will probably be lower.
Benefits on the sale of your home
For many years, the tax laws only allowed you to avoid paying capital gains
taxes when selling your home if you rolled over the proceeds into a home that
was more expensive. There were also some rules that allowed individuals over
the age of 55 to avoid some taxes.
In 1997, those rules were changed. Now the law generally allows a married
couple filing a joint tax return to exclude up to $500,000 of gains on the
sale of their home. For single return filers the limit is $250,000. You must
have lived in the home as your principle residence for at least two of the
five years before the sale. You can claim this benefit every two years. There
are some special rules if you do not meet that requirement for job changes or
health reasons. Consult your tax advisor for more details.
Summary
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 (including a potential large gain
if selling your home), be sure to get expert advice to make sure you get the
maximum benefits you are allowed under the tax laws.
