We pay taxes every year for our professional tax aside from other taxes such as realty and other taxes for businessmen. It is something that we have to face. But for homeowners, their tax obligations has been reduced with the federal government contributing between 10% to 35% (depending on their tax bracket) to their monthly home mortgage interest and property tax payments.
Below are some facts on basic home-related tax that every homeowner should know. But for complete information applicable to your specific situation, be sure to consult a tax professional. She can easily discuss with you whether you are an architect or a web design Sydney professional.
TAX FACTS: If your mortgage is not larger than the home’s purchase price and improvement costs, interest payments on the original mortgage are fully deductible for most homeowners. For purposes of deducting interest on up to two homes, there is an overall limit on “home acquisition” mortgage debt, making homeownership a good tax shelter.
As explained in the “VACATION HOMES” section, mortgage interest on a second home is also deductible. However, mortgage interest is no longer deductible if you own a third home for personal purposes.
For home equity loans (see “EQUITY LOANS” section), interest is deductible with some limitations.
HELPFUL HINT: For those mortgages taken out more than 90 days after a home purchase, the interest deduction is usually limited to the amount of the original (acquisition) mortgage plus $100,000. But you can add that amount to the deduction limit if you use some of the new mortgage to improve your home.
TAX FACTS: As much as $500,000 in tax-free profit can be pocketed by taxpayers who sell their principal residence. That is, if they file federal taxes jointly. For those who filed their federal taxes singly, they can gain at least $250,000 tax-free. However, to enjoy this, the property that the taxpayers sell must have been owned and used as their principal residence for any two of the prior five years.
Homeowners who sell their homes can pocket the profits as often as once every two years. However, if the home is sold due to special circumstances such as health problem or job loss and the two-year use and ownership tests are not met, the exclusion is prorated. Otherwise, gains of more than $500,000 or $250,000 are taxed at current capital gains rates.
Note: The Housing and Economic Recovery Act of 2008 has already changed the treatment of capital gains from the sale of a home that the owners sometimes used as a principal residence and sometimes used as a second home or rental property.
Gains from second home or rental use on or after January 1, 2009 will be taxed at capital gains rates but gains from principal residence may be excluded up to the $500,000 or $250,000 limits (providing ownership and use tests are met).
To compute the mixed-use gains tax, divide the total days that you use the property as a second home or rental (” non-qualified” use) by the total days that the home was owned (from the original purchase date). To calculate the taxable gain, multiply your total gain from the sale by that ratio. For example, if you sell your home after owning it for four years (which is equivalent to 1,460 days) and using it as a rental property or second home (rather than principal residence) for three months (equivalent to 91 days), the ratio would be 91/1460 = .062. If your total capital gain is $50,000, then your taxable gain is $3,100 ($50,000 x .062 = $3,100).
Note: For those whose spouse has already died, the surviving spouse may exclude the gains of up to $500,000 from a principal residence jointly owned with the deceased spouse for sales or exchanges after December 31, 2007. However, this is applicable if the property is sold or exchanged within two years of the spouse’s death and that standard ownership and use tests are met.
HELPFUL HINT: Records of selling and improvement expenses should be kept by homeowners because capital gains on home sales are still taxed by some states. Those expenses can also be used to determine your tax basis once you sell or rent the home.
TAX FACTS: For homeowners who purchased or refinanced a home from January 1, 2007 through December 31, 2011, qualified home mortgage insurance payments are deductible. For married couples filing separately, full deduction is available with Adjusted Gross Income (AGI) not greater than $50,000 or $100,000 for single taxpayers. Above those income, there will be no deduction for AGIs of $11 0,000 or $55,000 for married taxpayers who filed separately.
However, to avail of the deduction, you must itemize it on your tax return. (See instructions on Schedule A [Form 1040] or IRS Publication 936 for details).
HELPFUL HINT: Check the Box 4 on Form 1098 provided by your lender with the amount of interest and mortgage-related expenses you paid during the year to find the amount of qualified mortgage insurance you paid.
TAX FACTS: You can deduct up to $25,000 in losses from rental real estate against income from other sources if you have an adjusted gross income of $100,000 or less (excluding any loss from “passive activities,” several adjustments to adjusted gross income or taxable Social Security benefits). This deduction is allowable if you owned at least 10% of the property and “actively participated” in its management. (It is considered as “active” participation if you chose the tenants and approved outlays for maintenance). But you can still deduct some or all of your losses from rental real estate if your adjusted gross income is between $100,000 and $150,000. However, this depends on the amount of the loss.
HELPFUL HINT: Take note that if any rent losses were “suspended” in prior years, they are fully deductible in the year that the property is sold.
FORGIVEN MORTGAGE DEBT
TAX FACTS: In many cases, the mortgage debt on a principal residence that is forgiven by a lender is no longer taxable. In the past, forgiven mortgage debt was considered as taxable income. (Debt from buying or improving a principal residence may be forgiven in a short sale, foreclosure or debt restructuring of a property.) But the exclusion only applies to indebtedness forgiven in tax years 2007 through 2012 and is limited to $2 million or $1 million for married filing separately.
HELPFUL HINT: There is a newly revised Form 982 that is used for reporting the exclusion. Other restrictions also apply. For details, consult a knowledgeable tax professional.