Wednesday, July 23, 2008
What are the income tax benefits of owning a home?
Real estate Attorney Keith Schuman posts the next part of his guide to buying a co-op, condo or townhouse in Manhattan. He discusses the tax deductibility of interest, maintenance, second home mortgages and other considerations. Most people will engage several professionals to help in the acquisition process. These will likely start with a a real estate broker, and include a NY Real Estate Attorney, mortgage broker or bank. Since tax consequences are an important part of the decision, I personally think that it's always a good idea to discuss your plans to purchase with your accountant or financial adviser, right at the beginning of the process too. It will fine tune your understanding of the after tax cost of your real estate purchase. You'll find that all Corcoran Group and Comitini.com listings have a 'purchase cost analysis' tool online, that can be helpful as a first opinion on the after tax costs like the one in the red column on this listing. You can plug in new variables to help envision different scenarios based on size of down payment, interest rates, deductibility of maintenance and your personal tax bracket.
A guide to buying a Manhattan home (part 2)One of the greatest benefits to home ownership is that you can deduct from your taxable income certain expenses of owning a home. Practically speaking, when figured on an after-tax basis, the costs of home ownership are lower than the actual out-of-pocket costs. The higher your tax bracket, the greater the benefit these deductions are to a homeowner. The tax benefits are derived from two basic expenses: mortgage interest and real estate taxes.
Mortgage InterestWhen you make a mortgage payment, a portion of the payment goes toward repaying the principal amount of the loan and the rest toward paying the interest on that loan. During the first few years, almost all of the loan payments consist of interest, which can be deducted from your taxable income. At the end of each year, your lender will send you a statement denoting how much you paid in interest for the year. This figure then can be reported on your annual income tax return. There is, however, a limit of $1 million on loans used to acquire or to improve a home and a limit of $100,000 on additional debt (i.e., second loans and home equity loans). If your loan exceeds these amounts, interest on the excess amount is not tax deductible. Interest on a home equity loan also is tax deductible, even if you use the money to pay off other debts or for other non-housing purposes.
Real Estate TaxesAll real estate tax payments, whether paid out of an escrow account maintained by your lender or paid by you directly to the taxing authorities, are tax deductible. If the lender pays the tax bill out of the escrow account, the lending institution will provide you with a statement at the end of the year indicating the amount that was paid
Taxpayer Relief ActAs a result of the Taxpayer Relief Act of 1997, individual taxpayers can now realize up to $250,000 in tax-free gains on the sale of a principal residence. For married taxpayers who file jointly, the exclusion is $500,000. These exclusions cover any property that has been used as a principal residence for at least two of the five years preceding a sale. The deductions may be taken each time a taxpayer sells a principal residence, although the exemption may not be claimed more frequently than once every two years. This exclusion is available regardless of the taxpayer's age and is not affected by whether a homeowner had previously claimed the one-time $125,000 exclusion under the prior tax law.
Taxation of Second and Vacation HomesThe tax benefits of ownership also apply to second home or vacation home buyers. However, if you rent out your home for more than 14 days per year, the rules are more complicated. If you rent the property to someone for two weeks or less, you can treat the property as your residence (and you do not have to report the rental income). Generally, you can deduct interest on a loan (subject to the $1 million limitation) to acquire two homes and the real estate taxes on the two properties.
Maintenance Charges (Coops Only)Because coop monthly maintenance charges include a portion of the debt service on the building’s underlying mortgage and the real estate taxes, a portion of the maintenance (usually around 50 percent) qualifies for an income tax deduction for the coop owner.
About the author: Keith A. Schuman, Esq. is the founder of Schuman & Associates, LLC, a full service real estate firm that provides legal services to its clients, through all aspects of their transactions. Keith is a frequent contributor to comitini.com. Contact him at firstname.lastname@example.org or phone 212.490.0100.
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