This summer when I’m not working on projects for our clients, I am spending my time house hunting in this hectic Columbus real estate market. Since many are buying and selling houses in Columbus, I thought it was appropriate to have a refresher on some common tax implications of home ownership.
Buying, maintaining, and selling a home is generally one of the biggest financial decisions an individual can make. This is not an exhaustive list, just a few items that are can be helpful when considering the tax effects of home ownership.
Mortgage Interest Credit:
There are multiple incentive programs/credits to encourage first-time home buyers into home ownership. One such credit is the Mortgage Interest Credit. To claim this credit on Form 8396, a taxpayer must have been issued a mortgage credit certificate (MCC) by a state or local governmental unit under a qualified mortgage credit certificate program (issuance of an MCC is often subject to income limitations). This credit allows the tax payer to claim a percentage of their mortgage interest as a credit, up to $2,000 annually. If the taxpayer itemizes their deductions, they must decrease the Schedule A deduction for mortgage interest by the total of the credit.
For a taxpayer to itemize their deductions, their Schedule A deductions must exceed the standard deduction for the tax year. Owning a home often helps taxpayers qualify to itemize their deductions on Schedule A of their 1040. The two main deductions that relate from home ownership are real estate taxes on property owned and home mortgage interest paid on a taxpayer’s qualified home. If a taxpayer has never itemized their deductions before, here is a list of common deductions they should be aware, in addition to real estate taxes and home mortgage interest to so if the taxpayer will qualify to itemize:
Qualifying Medical Expenses
State and local taxes
Unreimbursed employee expenses
Residential Energy Credits:
Unfortunately most of the residential energy credits expired at the end of 2016. However, one federal energy tax credit remains for 2017; the solar energy credit (aka Investment Tax Credit). This federal credit allows a taxpayer to deduct 30 percent of the cost of a residential solar energy system on Form 5695.
Capital Gain Exclusion on Selling Primary Residence:
It is important to track your basis of your home, especially when it comes time to sell your residence. The basis of a primary residence is the purchase price plus any qualifying improvements to the home during the period of ownership. According to IRS Tax Topic 701, if a taxpayer is selling their home for a capital gain, the IRS allows a single filer to exclude up to $250,000 and married filling joint up to $500,000 to those who qualify for the exclusion. To qualify for the capital gain exclusion, the home must meet the ownership and use test. A seller will pass these tests if the seller owns the home and used the home as their main residence for a period aggregating at least two years of the five years prior to its date of sale.
If you have any questions regarding tax implications of how buying and selling a home will have own your tax returns, please meet with a Holbrook and Manter tax professional today!