Selling a home can have a significant impact on your federal and state tax returns. The federal Taxpayer Relief Act of 1997 states that when you sell your home you can keep, tax free, capital gains of up to $500,000.00 if you are married filing jointly or $250,000.00 for single taxpayers, or married taxpayers who file separately. To qualify for the exclusion, you must have lived in the home as your primary residence for at least two of the prior five years. This is not a one-time tax exclusion; it can be used as often as you meet the qualifications. The federal Internal Revenue Service Restructuring and Reform Act of 1998 further clarified the law and states, you can prorate the $500,000.00/$250,000.00 exclusion (not your specific gain) if unforeseen events, such as a job change, illness, or other hardship forced you to sell before you were able to meet the two year residency requirement. You will want to check with your tax consultant on other factors that may affect taxes resulting from the sale of your home.
- Whether you purchased the home or acquired it by gift or inheritance
- If the home was used partly for business or rental
- Costs associated with selling your home
- Home improvements or additions, which may help to offset capital gains
- Gain from the sale of a prior home on which tax was postponed prior to the Taxpayer Relief Act of 1997
Most, but not all federal tax benefits are also available from state tax departments. If you have moved or relocated, discuss your move with a tax professional well versed in state tax rules, especially if you are moving from one state to another.
Homeowners benefit from several generous tax advantages. The most important benefit is the mortgage interest deduction. People may deduct interest paid on mortgage loans totaling up to $1 million used to buy, build or improve a principal residence plus a second home. The IRS calls such loans acquisition debt. Points paid by the buyer or seller on a new mortgage loan for the purchase or improvement of a principal residence are deductible for the year in which the home was purchased.
Any points paid on a refinance mortgage, a loan to purchase a second home or a mortgage on income property must be spread over the life of the loan, according to Edith Lank and Miriam S. Geisman, authors of "Your Home as a Tax Shelter," Dearborn Financial Publishing, Chicago; 1993.
Note that when obtaining a new mortgage, the borrower usually is asked to pay interest from the closing date until the first of the next month. Check whether that charge is included in the year-end report.
Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income, say Lank and Geisman.
"A homeowner cannot deduct maintenance expenses, nor can he take depreciation deductions on his personal residence," states the "Realty Bluebook," 30th Ed., Dearborn Financial Publishing, Chicago; 1993.
Some moving expenses are deductible for people who changed jobs and relocated as a result. The IRS requires that the new employment be located at least 50 miles away, among other considerations, said Analisa Collins-Sears, a public affairs officer with the IRS' Bay Area office.
Resources: "Tax Information for First-Time Homeowners," a free guide published by the Internal Revenue Service. Order by calling 1-800-TAX-FORM.
The Mortgage Credit Certificate program allows first-time home buyers to take advantage of a special federal income tax credit. This program allows buyers credit in qualifying for the tax advantage they'll receive after they purchase the home. The amount of the credit is tied to a local formula that every city with an MCC program must follow. A MCC credit, which can total $2,000 or more, reduces the borrower's federal tax liability by an amount tied to how much one pays in annual mortgage interest. Both the borrower's income and the purchase price of the home must fall within established guidelines. To see if your community has an MCC program, call your local housing or redevelopment agency. You also may inquire with your real estate broker or the local association of Realtors.