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| It's Tax Season for Homeowners! |
Spring is in the air, and for most of us that also means it is tax
season. Without a doubt, planning and preparation are the two best tools to
ensure you don’t pay more than your fair share at tax time, and nowhere is this
more relevant than in real estate. Whether you’re a buyer or seller, real
estate transactions can trigger a variety of tax situations. Depending on how
well you plan and prepare will determine your tax outcome for the following
year, and especially the year when you sell your property.
TAX ISSUES FOR BUYERS
Aside from providing a place to live and a retreat from the daily "grind," home ownership affords a number of immediate well-known tax advantanges:- Mortgage interest and loan points are deductible on both primary and second homes.
- Mortgage insurance premiums may be deductible.
- Property taxes are deductible on primary and second homes.
- Home offices may be tax-deductible.
Keep in mind, however, in 2013 buyers with income exceeding
the threshold of the "Pease Limitation" ($250,000 single; $300,000
married/jointly) could find their mortgage interest deductions reduced.
TAX ISSUES FOR SELLERS
Home sellers can
typically expect to pay tax of 15-20% on any gains over the first $500,000 on
their primary residence if married filing jointly, or $250,000 if filing singly.
The final rate is determined by your income level and filing status. But how
are gains calculated? The IRS states:
“To figure the gain or loss on the sale of your
main home, you must know the selling price, the amount realized, and the
adjusted basis. Subtract the adjusted basis from the amount realized to get
your gain or loss.”
Your property’s basis
factors any improvements you’ve made (not general repairs required from normal
wear and tear) such as room additions, interior modernizations, landscape
improvements (sprinkler systems, fencing where none previously existed,
swimming pools, etc.), and heating and air conditioning, electrical, plumbing
or insulation upgrades. Some energy-saving improvements can also qualify for a
tax credit.
With all the improvements you'll likely make over all the years you'll own your home, it is VERY important to keep accurate records of these expenditures for as long as you own the property. This little bit of planning and preparation will help you accurately calculate the property's basis when it is eventually sold.
On a final note, you should be aware that Congress passed new legislation for 2013 that imposes a
3.8% tax on certain gains, including real estate, for individuals with adjusted
gross income above $200,000 or couples filing jointly with income above
$250,000. For more detailed
information, visit the Internal Revenue Service website or read IRS Publication 530 – Tax Information for Homeowners.
The information provided here is not guaranteed
and you should always consult with your tax professional before making any
financial decisions that could affect your tax liability.
Nanette Shapiro
714-924-0781
