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Tax advantages of owning Real Estate – Part 2 (Personal Residence)

By
Services for Real Estate Pros with Charles G. Perkins, CPA

Personal Residence tax advantages

Owning a personal residence allows individuals to really take advantage of itemized deductions.  For your personal residence you are allowed to deduct the property taxes paid during the year and qualified mortgage interest paid.

Qualified interest is interest paid on a personal home mortgage.   Generally, the mortgage is limited to $500,000 if it is used to acquire or improve one’s home.  Home Equity interest is deductible if the debt is $100,000 or less ($50,000 if single).

A personal residence is not limited to just your primary residence, it can include a second home even if the second home is not used during the year.  If the second home is rented out for a portion of the year then you must stay in the home greater than 14 days and a minimum of 10 percent of the amount of time rented.

Any points paid on a qualified mortgage are deductible as well.

For some mortgage insurance (PMI) maybe deductible as well.  Some borrowers may be required to purchase private mortgage insurance or be required mortgage insurance under VA or FHA programs.  These payments are deductible.  This is not property protection insurance which is not deductible.

When you go to sell your personal residence, you may be eligible to exclude up to $500,000 ($250,000 if single) of any gain on the home.  It is necessary to keep good records to document any improvements that add to the original purchase price.  To qualify one must have owned the home at least 2 years and lived in it at least two years in the last five years.

 

For more information see:

IRS publication 523

Itemized Deductions

 

Posted by

Charles G. Perkins, CPA

Servings Small Businesses in the Puget Sound Area

 

Cell: (206) 422-5504

Office: (206) 228-1988

email: charles@charlesperkinscpa.com

website: www.charlesperkinscpa.com

 

Charles G. Perkins, CPAI look forward to meeting your business and tax needs.  I also have many partners in business that can meet your other business needs.  These include contractors, insurance agents, investment advisers, financial planners, mortgage advisers, and many others.

Brian Griffis
Realty Choice - Springfield, MO

Good information Charles.  Just be sure to mention to your clients that those deductions only apply if they itemize, which many don't, and that any deduction is not a tax credit.  Many people are only in the 15% tax bracket, so they are only going to get back 15 cents of every dollar they spend on INTEREST.  Not the best reason to go out and buy a house.  It is this thinking that has gotten so many people in trouble.  Better to buy a personal residence if you need it, not as a tax deduction, or an "investment."

Aug 16, 2009 05:02 AM
Karen Kruschka
RE/MAX Executives - Woodbridge, VA
- "My Experience Isn't Expensive - It's PRICELESS"

Charles I gulped when I saw the title until I noticed you were a CPA  :)  Karen

Aug 16, 2009 10:41 AM
Charles Perkins
Charles G. Perkins, CPA - Burien, WA

Brian - In most cases someone that owns a home can itemize.  There are exceptions.  I agree that tax savings is not the best reason to own a home, but it is a great side benefit.  You might be suprised what some can afford in the 10 & 15% tax brackets.  I have also met some that earn a great deal, but can seem to put it together.

Karen - Thanks for looking and commenting.

 

Aug 16, 2009 08:02 PM
FN LN
Toronto, ON

Charles - I'd just like to note that your posting does not apply to residents of Canada who only file tax returns with the Canada Revenue Agency.

Aug 21, 2009 02:08 PM
Charles Perkins
Charles G. Perkins, CPA - Burien, WA

Marc - The US / Canada tax treaty has some peculiarities that sometimes can suprise you.  I have known many Canadians over the years that did not file US tax returns that later discovered they owed US taxes due to a misunderstanding of the tax treaty.

When dealing with foreign investments it is often wise to seek competant advisors to insure that a transaction is structured properly and that income is reported to the appropriate taxing authorities.

 

Aug 23, 2009 06:21 PM