03.11.15 by Jeff Johnson
It’s tax season! And although owning real estate can make taxes more complex, many homeowners receive considerable tax benefits of homeownership — especially if they sold a home or relocated for a job in the previous year. Here’s a look at three ways homeownership can pay off at tax time.
When you purchase a home, you will likely get a mortgage. Your monthly mortgage payment is made up of both principal (paying down the loan) and interest (what the lender charges for supplying the loan). As a way to incentivize homeownership, the federal government provides a tax benefit when it comes to the interest portion of your mortgage payment.
A homeowner can deduct, dollar for dollar, the interest portion of their mortgage payment from their income. For example, say a homeowner’s annual salary is $100,000, their mortgage payment is $1,200 per month, and the interest portion of that payment is $1,000. At the end of the year, they have a $12,000 tax deduction. In essence, their taxable income is reduced to $88,000.
Homeowners also get a tax break when they sell their home. If you purchase your home for $200,000 and sell it for $400,000, you have a $200,000 gain — that’s capital gains income.
If you have an income by way of a job, or the sale of stock or mutual funds, you pay income tax on that gain. With homeownership, it’s different. If you are single and lived in the home for at least two of the past five years, you do not have to pay any income tax on that $200,000 gain — in fact, you don’t have to pay on gain up to $250,000. Married couples filing tax returns jointly and following the same owner occupancy guidelines are exempt up to $500,000. Where else can you generate income without paying taxes on it?
Tax credits for moving
If you moved due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses. If you purchase a home in one state and sell one in another, you should check with an accountant in both states. There may be benefits realized in one state but not the other, such as tax credits for moving expenses, if the move is a part of a job transfer.
Ask us how this works, at NewLook Realty Company we can help you answer these questions and more.
Source: Zillow Blog