Tax season can be a stressful time for many Americans, but for those who own homes it's a time to add up the many tax benefits homeownership brings. If you do not own a home yet, take a few minutes to read our newsletter. You may find that buying a home makes more sense than ever before.
Keep in mind, the information provided here is a summary of home-related tax issues rather than a comprehensive guide. In addition, although this information was accurate at press time, tax laws change continually. We strongly recommend you consult a professional tax advisor or the Internal Revenue Service for authoritative answers to your tax questions as they apply to your specific situation.
A WORD ABOUT GAINS
TAX FACTS: Taxpayers who sell their principal residence can pocket -- tax-free -- as much as $500,000 in profit if they file federal taxes jointly, or $250,000 if they file singly. The property must have been owned and used as their principal residence for any two of the prior five years. Homeowners can shelter the profits on the sale of a home as often as once every two years. If the two-year use and ownership tests are not met, but the home is sold because of special circumstances (i.e., health, job loss, etc.), the exclusion is prorated. Otherwise, gains above $500,000 or $250,000 are taxed at current capital gains rates, which vary depending on your tax bracket.
NEW RULE #1: The Housing and Economic Recovery Act of 2008 changed the treatment of capital gains from the sale of a home that the owners sometimes used as a principal residence and sometimes used as a second home or rental property. Gains attributable to second home or rental use on or after January 1, 2009 will be taxed at capital gains rates, while gains attributable to principal residence use may be excluded up to $500,000 or $250,000 limits (providing ownership and use tests are met).
To compute the mixed-use gains tax, divide total days of property use as a second home or rental ("non-qualified" use) by total days the home was owned (from the original purchase date). Then multiply total gain by that ratio to calculate the taxable gain.
For example, you sell a home after owning it four years (1,460 days) and using it as a rental property or second home (rather than principal residence) for three months (say, 91 days). Your ratio: 91/1460 = .062. If your total capital gain is $50,000, then your taxable gain is $3,100 ($50,000 x .062 = $3,100).
NEW RULE #2: For sales or exchanges after December 31, 2007, surviving spouses now may exclude gains up to $500,000 from a principal residence jointly owned with the deceased spouse, providing the property is sold or exchanged within two years of the spouse's death and standard ownership and use tests are met. (Previously, to claim up to $500,000, the surviving spouse had to sell or exchange the property within the tax year of the spouse's death.)
HELPFUL HINT: Homeowners should continue to maintain records of selling and improvement expenses because some states still tax capital gains on home sales.
In addition, those expenses can be used to determine your tax basis once you sell the home.
DEDUCTION FOR NON-ITEMIZERS
TAX FACTS: On 2008 returns only, homeowners who take the standard deduction (rather than itemizing) can take an additional standard deduction -- up to $1,000 for married joint-filers, $500 for single filers -- for state and local property taxes.
HELPFUL HINT: This deduction helps defray the cost of owning a home for homeowners who have no mortgage or have low mortgage-interest expenses that, together with other deductions, do not exceed the standard deduction.
e-HomeNews for January, 2008