Home Ownership and Taxation

Call Beucler Company CPA to help you with maximizing your income tax deductions.

Income tax laws can be difficult to understand and are always changing.  Make sure you are maximizing your deductions and that your records are audit proof.

Buying a Home

If you’re like most people, your home is the largest investment you will make in a lifetime.  It is a long-term investment that plunges most homeowners into instant debt, but it also provides ongoing tax deductions, such as mortgage interest and property taxes.

Maintaining Records

You should maintain records of all purchase costs and improvements to your home for as long as you own your home.  While current tax law allows you to exclude up to $250,000 ($500,000 for married couples) of the gain on sale of your primary home, tax laws are always changing.   Current tax laws are not permanent.  There is no guarantee this exclusion will be in place when you sell your home, your gain could exceed the exclusion, or you could only qualify for a partial exclusion.  Additionally, you must own and use the property as your primary residence for at least two of the last five years to qualify for this exclusion.  Frequently, tax payers convert their primary home into rental properties or the home becomes the taxpayer’s second home. 

The Housing Assistance Tax Act of 2008 has changed the exclusion that applies to gain from the sale or exchange of property as is allocated to periods of nonqualified use.  A “period of nonqualified use” is any period after December 31, 2008 during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse. 

Although it is important to document your purchase price, this is not the only cost you should record.  You should also keep track of the following:

  • Closing costs, such as abstract fees, title and search fees, recording fees, survey fees, and transfer taxes.
  • Points paid, loan origination fees, or loan discount points.
  • Renovation costs.

Homes require upkeep.  Some of the work is ordinary maintenance, and some is expended to make improvements or renovations.  It is important to keep track of the amounts spent on improvements by keeping the receipts.  These expenses increase the total cost invested in your home.  If the upkeep increases the value rather than maintains the value, it is considered an improvement. 

  • Normal painting and wallpapering are repairs unless done as part of a renovation project that increases the home’s value as a whole.
  • Fixing the roof may be a repair, but replacing it is an improvement.
  • Some examples of other improvements include landscaping, a new driveway, new windows, fencing, or adding a storage shed.

Tax Deductions

Many new homeowners expect a new home to drastically lower their taxes, and many are surprised by the actual result.  Some are disappointed to find out that they can not itemize deductions in the first year because they only incur mortgage interest and property taxes for part of the year. 

  • You may deduct qualified mortgage interest and points on up to $1 million ($500,000 for married filing separately) of acquisition indebtedness secured by your main home.
  • A second residence can qualify for the interest deduction, but you must amortize the points over the term of the loan.
  • You can also deduct up to $100,000 ($50,000 for married filing separately) of home equity indebtedness interest unless the itemized deduction phase-out rules apply.
  • You can deduct assessed property taxes in the year they are paid.
  • Back taxes you pay on the property become part of the acquisition cost rather than a current deduction.

Selling a Home

  • To calculate your gain or loss on the sale, you will need the cost invested.
  • If the sale results in a loss, it is a non-deductible personal loss.
  • If the sale results in a gain, you may be able to qualify to exclude the gain up to $250,000 ($500,000 for married couples).
  • You must own and use the property as a principal residence for at least two of the last five years to qualify.
  • To qualify you could not have used the exclusion for any house sold in the previous 24 months.

The taxpayer should seek advice
Based on the taxpayer’s particular circumstances
From an independent tax advisor

Beucler Company CPA, Inc.
2503 Summit St.
Columbus, OH  43202
(614) 784-1099

Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.