As spring has arrived and the housing market heats up, it’s important to review the advantages of home ownership. After all, a home is the single most valuable asset in many people’s possession. It’s important to remain aware of the tax impact of homeownership.
The good news is that, at each of the three general stages of owning a home, an important tax break is available.
Q: What tax breaks are available for new home owners?
1. Buying/owning: Mortgage interest deductions.
One of the biggest tax perks of buying a home is the ability to deduct your mortgage interest payments. So be sure to carefully track the debt you incur to buy, build or improve your home — known as “acquisition indebtedness.”
Generally, taxpayers may deduct the interest on up to $1 million in acquisition indebtedness on their principal residence and a second residence. Plus, you may be able to write off interest on an additional $100,000 in home equity debt (known as “equity indebtedness”).
In the past, the IRS has challenged some equity indebtedness claims where the debt was used to acquire the home. But more recent U.S. Tax Court decisions have bolstered confidence that most taxpayers should be able to deduct interest on the full $1.1 million amount.
Q: What tax incentives can I take advantage of if I’ve been in my home for 5 years or more?
2. Improving: Energy-related incentives. The American Taxpayer Relief Act of 2012 (ATRA) included some provisions of which every homeowner should be aware.
Under the act, a homeowner may claim a 10% credit for energy-efficient improvements to the home, up to $500 in 2014 (current year reduced by any credits claimed in previous years) for qualifying purchases and installation costs. Eligible thermal replacement windows and skylights installed may account for up to $200 of this amount.
Q: I’m getting ready to sell my home. What tax implications should I be aware of prior to putting it on the market?
3. Selling: The home sale exclusion. Taxpayers may exclude up to $250,000 ($500,000 for married couples) in capital gains on the sale of a principal residence (including condominiums, manufactured or modular homes, recreational vehicles, and even houseboats), subject to certain limitations.
To be eligible, you must have owned the residence for at least two years, used it as a principal residence for two of the five years preceding the sale, and not have claimed the home sale exclusion within the last two years. If you’re forced to sell your home in less than two years because of an unexpected life change (such as death, loss of employment or a natural disaster), you may be allowed a pro-rata exclusion amount based on how long you’ve lived in the home.
One interesting, recent twist on this tax break: Gains eligible for the $250,000 home sale gain exclusion are also excluded from the new 3.8% Medicare contribution tax on net investment income brought about by the health care act.
Lisa M. Riccardi is a CPA with the VonLehman Company. For more information on this topic or many other tax, business and investment topics, contact your CPA, Business Advisor, or Lisa Riccardi, CPA at lriccardi@vlcpa.com.
Disclaimer: The technical information in this article is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.
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