Real Estate Matters: Rules to save your green
The IRS and the state of California have many rules regarding the purchase and sale of property. Some of the rules are helpful and some are not. To protect oneself it is wise to be aware of different rules and then ask your tax representative to assist you with the proper and creative procedures to utilize them.
Capital-gains exclusion: Now and hopefully for years to come, there is a tax advantage for people who move often. The rule is that a single or married couple can have a gain of $250,000 for a single or $500,000 as a couple without paying capital gains on either amount. The important factor is to stay within the rules. You have to claim the property as your principal residence for at least two out of five years. Those who know this rule are very tempted to move often especially in an area where the property values keep climbing. On the other hand this is extremely difficult for the nesters and therefore they miss out on this lucrative and free-money "green" solution to gain wealth quickly.
The law on capital-gains tax changed on May 7, 1997. The old law allowed a person(s) to transfer all their capital gains from the sold property to the new property without any capital-gains tax. This law has been dropped in favor of the exclusions described above.
There are exceptions to the two-year rule. If you have to sell because of health matters, employment change, divorce, death in the family, multiple births or some other life-changing event, you may qualify for a partial exclusion of the $250,000 or $500,000. You will receive a percentage of the tax break dependent on the time lived in the residence. Example: Twelve months could earn 50 percent of the full capital-gains exclusion.
Vacation homes: The IRS has established special tax advantages to owning a second home.
A. You can write off the interest of a secured debt on your primary residence and the second home up to a total debt of $1.1 million.
B. You can deduct property taxes on all your homes; there is no limit.
C. You are allowed to rent the second home out for tax-free rental income for 14 days. You do not have to report the 14 days of income on your tax returns. It is tax-free income.
D. If you rent the home out for more than 14 days a year, then the property is qualified as an income property and the income is then taxable.
Late fees: Late fees on your home mortgage can be deducted as mortgage interest.
Mortgage prepayment penalties: If you pay off your home mortgage early and have to pay a penalty, that fee can be deducted as mortgage interest.
Points deductions on home mortgages: In most cases the points paid for a loan are tax deductible. Points can be paid and deducted on mortgages both original and refinanced. However the points on the original mortgage loan can be deducted for the year paid but on a refinance loan it is deductible over the life of the loan.
Points on home improvement loans are deductible as well as points paid on second home mortgages but only over the life of the loan.
Interest rate deductions change every year and IRS points deductions are subject to change. Please use a CPA or tax professional to ensure proper deductions.
Keep track of the cost of capital improvements to your home because it can save you mucho green in most cases when it is time to sell.
Nancy MacLeod has run an independent boutique real estate firm, Homes2Buy.com, since 1999. She was named Palo Alto Realtor of the Year in 2011. She can be reached at firstname.lastname@example.org.