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Owning a Home is Still One of the Best Tax Breaks Available |
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Sunday, 13 April 2008 |
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Tax day is looming for millions of Americans, and the deadline of this Tuesday at midnight will see many of us standing in line at the Post Office waiting to hand in our share of the national revenue. But if you bought, owned, or sold real estate during the last year, your burden may be a bit lighter due to the many tax incentives built into our tax code for homeowners.
There are many tax benefits associated with ownership of your home as a principal residence. They can be divided into three areas: (1) the purchase; (2) mortgage interest expense; and (3) profits from selling your home.
The most significant tax advantage in the buying process is the deductibility of loan discount points (including any loan origination fees). The IRS says discount points are deductible regardless of who pays them, as long as they are normal and reasonable for the area. In addition, you must then live in the house as your residence.
This is an unusual deduction, for it is rare that the IRS allows a deduction for an expense paid by another party. But in this case, Congress determined that many buyers prefer to include loan origination fees in the purchase price to hold down up-front cash expenditures, so they allow the buyer to have the instant deduction, even if the fee is paid by the seller. The IRS compensates for this generosity by decreasing your acquisition basis if your build these deductible fees into the price.
In the current buyers market, my advice is always to ask the seller to pay all your loan expenses. But if you end up having to pay anything, make sure it's the discount points. That way, you get the deduction now and don't suffer the capital gains effect of a lowered basis later.
The second area of tax benefit for home buyers is the interest expense on the loan you take out to buy your home. The interest you pay on your home mortgage is still 100% tax deductible in most cases.
Generally speaking, your deduction for home mortgage interest is limited to the interest you pay for the loan you used to first purchase your home, up to a debt limit of one million dollars. Know that, as you pay down your loan balance, your acquisition indebtedness decreases. Subsequently refinancing to a higher balance may not provide a total deduction for the new interest payment.
The one exception to this limit is an additional one hundred thousand dollars of home equity debt, regardless of the source. So if you originally borrowed $200,000 to purchase your home, then paid that balance down to $100,000, you could refinance for up to $200,000 later and still deduct all the interest expense. Interest on debt above that level might not be deductible. Check with your CPA for details.
Lastly, PMI fees may be deductible if you qualify. You must have purchased your home during 2007 and your Adjusted Gross Income must be under $100,000. Other closing costs are not deductible.
The last category is tax breaks when you sell. Here, the big break is formally known as The Exclusion of Gain on the Sale of your Principal Residence. It is better known by it's nickname, Section 121.
Generally speaking, if you have owned and occupied a house for two of the last five years as your principal residence, you are eligible to exclude certain amounts of the capital gain from taxation. If you are married and file a joint tax return, you can exclude up to $500,000 for each residence you sell. If you are single, the limit is $250,000.
There is no requirement that you reinvest in anything, and you are free to do with the money as you please. Furthermore, you can do this every two years for the rest of your life. This is a truly remarkable tax break that is only available to home owners, so I suggest you take advantage of it.
Several years ago, many questions arose about homeowners who sold their homes having occupied them for less than the two year period, and whether or not they might get some sort of reduced benefit. In a generous response, the IRS ruled that you can take a pro-rated portion of this exclusion, based on the percentage of the required occupancy period you meet. However, you may take the pro-rated potion only if you experience a change in employment or health, or if you have an "unexpected circumstance" in your life.
Because the tax benefit associated with selling your principal residence is potentially so large, it is important to understand it fully. You can download IRS publication 523 from the tax agency's website at irs.gov, but it's also wise to check with your CPA for all the details.
By the way, if you are like many readers who are wishing they started on their tax return many weeks ago and now dread the work needed to complete the task by Tuesday at midnight, you can just as easily file a request for an automatic extension of time to file.
It's called Form 4868, it's easy, and you can also download it for free at irs.gov. Simply enter the form number in the search box and follow the instructions. Then you have another six months to put off the inevitable paperwork.
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Upcoming Events
John Adams Presents
LANDLORD SURVIVAL TRAINING
with John Adams
Tuesday, February 28th
Being a landlord can be a rewarding experience. It can also be a difficult one if you don't have the knowledge and understanding of what the process requires.
Few schools offer degrees in property management, so most landlords learn "on-the-job" through acquired knowledge and on-the-job experience, essentially re-inventing the wheel. This is an expensive and depressing way to learn anything.
Whether you're a full-time landlord or just getting ready to purchase your first rental property, whether you are a licensed Georgia real estate professional or an accidental landlord, this seminar will help you improve your property's value, increase your cash flow and decrease your expenses, from attracting (and retaining) good tenants to maintaining your property to understanding your rights and obligations under the law.
For more details and to register click HERE
PROPERTY TAX REDUCTION WORKSHOP
with John Adams
Tuesday, March 27th
One of the significant annual expenses faced by any Georgia property owner is ad valorem property tax. Depending on where you live, it can be as high as three percent of the property's fair market value, and it must be paid year after year after year.
As a result, efforts to minimize this expense are not only worthwhile, they are encouraged by Georgia law. The phrase "ad valorem" means that each property is taxed based only on its value, and no one is required to pay a penny more than the minimum the law demands.
At the Property Tax Reduction Workshop, real estate expert John Adams will review the system he has used for over thirty years to reduce valuations and assessments in Georgia counties and municipalities, saving himself literally hundreds of thousands of dollars over the years.
In this 3 hour information packed seminar, John will teach you how to:
1. Understand the legal process of Property Tax Assessment
2. Meet the newly uniform Tax Deadlines
3. File your own Property Tax Return with a realistic valuation
4. Document your PT-50R with facts to support your case
5. Proactively meet with your Appraiser to reach an agreement
6. Protest your Notice of Assessment in an Intelligent manner
7. Give the Assessor an Opportunity to Save Face
8. Appeal to your Board of Equalization, in person or by mail
9. Make Your Case to the BOE
10. Take Your Case to Superior Court if necessary
If you are not doing all these steps now, you are likely costing yourself hundreds or thousands of dollars a year. If you own just one house, you could easily save over a thousand dollars over the next three years. If you own properties valued collectively over a million dollars, you are literally throwing away your profits year after year.
For more details and to register click HERE
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