© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Learning Objectives Define and list examples of income tax deduction benefits

Chapter 17

© OnCourse Learning. All Rights Reserved.

Federal Taxation of Home Ownership

Learning Objectives

Define and list examples of income tax deduction benefits of home ownership Define, and be able to calculate, basis, adjusted basis, amount realized, and gain

realized in the sale of a personal residence

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Tax Deductions for Home Owners

Real property taxes:• Taxes on real property are deductible for income tax purposes in the year paid• Assessments are not deductible • Assessments may be added to the basis of the property, reducing the gain that

must be claimed when the property is sold

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Mortgage interest:• Often a major advantage of home ownership• Savings depend on: • Amount of interest paid• Taxpayer’s income bracket• Amount of the minimum standard deduction

versus• Number of itemized deductions the taxpayer claims:

• Note: Real Property taxes and mortgage interest are the only 2 deductions provided by homeownership

• Recent trends of lower mortgage interest rates and higher minimum standard deductions have reduced or eliminated some tax savings for those with lower incomes and small to moderate mortgage interest payments

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Mortgage interest:• Two types of debt which generates deductible interest:

1. Acquisition debt is the debt incurred in the purchase of a personal residence. The interest generated on the first $1,000,000 is deductible

2. Equity debt is all debt secured by a qualified residence to the extent it does not exceed the fair market value of the residence reduced by the acquisitions debt. The interest generated by the first $100,000 is deductible

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Sale of a Personal Residence Basis

Capital Gain:• Profit from the sales of property• Used to determine tax liability

Capital Losses:• Losses on the sale of a home• May not be deductible

Capital Improvement:• Items that are permanent and will increase

the value of the property

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Sale of a Personal Residence Basis

Basis:• The amount originally paid for the property. Typically the purchase price• Acquisition debt is the debt incurred in the purchase of a personal

residence. The interest generated on the first $1,000,000 is deductible. Adjusted Basis:• Original costs incurred as a result of purchasing and acquiring title to the

property and cost of capital improvements Amount Realized:• The amount realized is the sales price minus allowable expenses of sale

Costs of Acquisition:• Allowable costing costs

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Effect of Purchase and Sale

Expenses that may effect the taxable gain

• Title Insurance Premium• Transfer Tax• Attorney’s Fees• Deed Preparation• Closing Costs• Discount Points

• Loan Origination Fee• Other expense items such as

surveys, recording, etc.• Commission• Fix-up Costs• Moving expenses• Financial Penalty

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Rules for Taxation of Capital Gain

$250,000/$500,000 home sale exclusion:• Taxpayers Relief Act of 1997, replaced both the over 55 rule and the rollover

rule • Anyone who has owned and occupied a primary residence for two out of the

five years prior to selling it can exclude a gain up to $250,000• Ownership and occupancy requirements do not have to be met concurrently• A married couple filing jointly receives a $500,000 gain exclusion if both

meet the occupancy requirement• If one spouse dies, the other spouse can sell the property in the same year as

the death and claim up to the $500,000 exclusion• In the event of unforeseen circumstances such as a change in health or

employment, a prorated portion of an individual or married couple’s exclusion can be used to shield gain from taxation

• May not exclude the gain on the portion of the property attributable to the home office

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Special Rules That May Apply to Some Residential Transaction

Installment Sales Like-Kind Exchanges Vacation Homes Home Office

Documents

© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Learning Objectives Define and list examples of income tax deduction benefits