Whether you’re an owner now or expect to be one in the future, it is important to be familiar with the federal tax laws that affect homeownership. Since personal income tax was enacted in 1913 with the 16th amendment, homes have had preferential treatment.
The mortgage interest deduction is based on up to $750,000 of acquisition debt used to buy, build or improve a principal residence. In addition to the interest, the property taxes are deductible, limited to the new $10,000 limit on the aggregate of state and local taxes (SALT). The taxpayer may also deduct interest and property taxes subject to limits on a second home.
Homeowners can decide each year whether to take itemized personal deductions or the allowable standard deduction which was significantly increased under the Tax Cuts and Jobs Act of 2017.
Single taxpayers may exclude up to $250,000 of capital gain on the sale of their home and up to $500,000 if married filing jointly. They must have owned and lived in the home for at least two of the last five years. For gains more than these amounts, a lower, long-term capital gains rate is paid rather than one’s ordinary income tax rate.
Capital improvements made to a home will increase the basis and lower the gain. Homeowners are probably familiar that large dollar expenses like roofs, appliances or major remodeling are capital improvements. However, many lower dollar items may also be considered improvements if they materially add value or extend the life of the property or adapts a portion of the home to a new use.
Homeowners are urged to keep records of money they spend on the home that they own over the years so that their tax professional can decide at the time of sale what they must report to IRS.
You can download a helpful Homeowners Tax Guide that explains in more detail and includes a worksheet to keep track of the basis of your home and capital improvements.
June and July are two of the busiest home sale months of the year. When inventory is in short supply and you may be competing with other offers, it is important to show the seller you’re serious. Make your offer look as good as possible because you may not get the chance to make another offer or accept a counter-offer from the seller.
Put yourself in the seller’s shoes. Your home has just gone on the market. There is lots of activity and suddenly there is more than one purchase offer. The seller’s first consideration may be to accept the highest offer, but there are many other things to consider like closing dates, closing costs, possible repairs, contingencies, and of course the ability of the borrower to get a loan.
Offer a fair price for the property in your initial purchase agreement. It shows sincerity and good faith that you’re actually trying to purchase the home and not trying to take advantage of the seller. The old adage that you can always go up later may never happen if there are multiple offers on the property in the beginning.
- Remove the seller’s uncertainty that you may not be approved for a mortgage by having a pre-approval letter from your mortgage company.
- Show your sincerity by increasing the normal amount of earnest money customary for the area and price of the home. The earnest money will be applied toward your down payment and closing costs. You might also consider offering to place even more money in escrow after the contingencies have been met.
- Specify a closing date in the contract (you must), but if in fact you can, then acknowledge that you can be flexible to accommodate the sellers’ moving date. Once a closing date of the contract is agreed upon, any change to it must be mutually agreed upon.
- Make the contingency periods shorter if possible so that the seller will know sooner rather than later that the contract with you is on solid ground.
- If the contingency really isn’t important to you, leave it out of the offer. The more contingencies included in a contract, the more the seller will wonder what might happen to keep it from closing.
- You MIGHT want to write a personal note to the seller explaining why you like and want their home; and or consider including a picture of your family and pets. Discuss this with your agent though; these kind of personalized touches come across well to some sellers and backfire with others.
One way to minimize the odds of competition with multiple offers is by not procrastinating. When you have decided to write a contract, don’t wait; do it as swiftly as is practical. Your agent will be able to help you craft a solid offer that makes you look serious and can give you advice that may be unique to your situation.
You’ve been planning this trip for some time and almost every detail has been considered…or has it? Have you thought about how to protect your home while you’re out of town? What’s going to make sure that everything you left is still there when you return?
Nothing could ruin a trip more than coming back to find out your home has been burglarized or worse. It makes sense to spend a little time before you leave making sure your home is as safe and sound as it can be.
There are a host of internet apps for controlling camera door bells, video cameras, door locks, garage door openers, light and thermostat controls. You can monitor your home whenever you have an Internet connection. The question is whether you want the distraction from your trip.
Consider these low-tech suggestions along with your other normal efforts:
- Tell your neighbors you’ll be out of town and to be aware of any unusual activity.
- Notify your alarm company
- Discontinue your postal delivery
- Use timers on interior lights to make it appear you’re home as usual.
- Don’t make it easy for burglars by leaving messages on voice mail OR POSTING ON SOCIAL NETWORKS.
- Post about your vacation on social networks if you like, after you’ve returned.
- Remove the hidden spare key and give it to a trusted neighbor or friend.
- Lock everything, double-check and set the alarm.
- Take pictures of your belongings in case you need them. (Actually a good practice for insurance purposes anytime, not just prior to a vacation.)
- Disconnect TVs and other equipment in case of unexpected power surges.
- Adjust your thermostat.
- Arrange for lawn care.
- Consider disconnecting the garage door opener.
- Put irreplaceable valuables in a safety deposit box.
It’s nice to go out of town on a well-deserved trip and it’s always nice to get back home…especially when it is just the way you left it.
IRS has provisions for homeowners regarding the sale of a principal residence that allows for temporarily renting the home without losing the ability to exclude the gain if the home is sold under the correct conditions.
The rules for the exclusion of gain on the sale of a principal residence are:
- Up to $250,000 of gain may be excluded for single taxpayers and up to $500,000 for married taxpayers filing jointly.
- Ownership and Use must have been a principal residence for two of the five years preceding the date of sale (closing date). This allows for a temporary rental for up to three years maximum.
- Either spouse may meet the ownership test.
- Both spouses must meet the use test.
- No exclusion has been used in the previous 24-month period.
Let’s pretend that a person had owned a home more than two years. This person married and moved into their new spouse’s home two years, six months ago. That person decided to sell their home and would have approximately $200,000 of gain in the sale.
If the property is put on the market, sold and closed prior to the passing of three-years since they moved out, then the home would still be eligible for the section 121 exclusion on the sale of a principal residence. If the sales closes after that three-year period, the owner would owe tax on the gain. If the long-term capital gains rate for the owner was 15%, they would owe approximately $30,000 in taxes.
If you or a person you know is in a situation like this, they should certainly seek professional tax advice as well as discussing the marketing and value of the property with their real estate professional. This is something that I have experience with; call me at (316) 337-5154. The timing is very important and critical to a favorable outcome.