Tax Tips for Buyers & Sellers

First Time Buyer? Time to Start Itemizing.

Once you buy a home, the interest payments on your mortgage are tax deductible, which usually qualifies you to deduct more than the standard deduction.  In addition, you can also begin deducting things like property taxes, interest on home equity lines of credit, charitable contributions, etc.  Sometimes there are even credits for energy efficient upgrades to your home.  Keep in mind that the standard deduction for 2014 is $6,200 for taxpayers who are single or married and filing separately, $9,100 for head of household filers and $12,400 for those married, filing jointly.  If your deductions exceed this amount, it may be beneficial for you to discuss itemizing your deductions with your financial adviser or tax specialist.

Capital Gains & Other Tips for Sellers

Selling your home is a big decision. Whether it’s because you’ve outgrown your home, you want to downsize or because you must sell due to unexpected circumstances like a job transfer or a lay off there are many issues to consider. The tax implications of a home sale can be confusing and difficult to navigate. Your accountant or tax adviser will help you understand the these complex issues.  Being aware of the potential issues before you sell your home will help you make well informed decisions.

The biggest and sometime the scariest issue is the Capital Gains Tax.  Capital Gains Tax applies on the appreciation of a home.  If you sell your home after owning it for two years or less, you will be face with a short term capital gains tax.  It works like this: if you purchased your home for $220,000 last year, and sold it this year for $275,000, you could owe taxes on the $55,000 capital gain on your home.

If you have lived in your home for over 2 years, or if it was your primary residence for two of the last five years, you’re probably in the clear.  The first $250,000 of capital gains is usually exempt ($500,000 for married couples filing jointly).  But, don’t panic too much if you haven’t lived in your home for over two years: there are exceptions to capital gains tax depending on your situation.  The tax may be waived or reduced for a number of reasons which include divorce and  job transfer.  The rules governing the application of capital gains tax are very nuanced so you should certainly contact your financial adviser or tax specialist to go over your particular circumstance.

If you do find that you owe capital gains tax, you can still reduce your tax burden by calculating your cost basis. Your cost basis is you invested in your home including the purchase price. But the purchase price is not the only thing that can be counted toward the cost basis of your home. It can be affected by expenditures (outside of routine maintenance) that you incurred to improve your home.  Did you remodel your kitchen? Bathroom? Add a bedroom? Make significant landscape changes? Costs such as these may be added to your cost basis.  Additionally, you can count many selling costs as part of your cost basis, which will further help to reduce your capital gain.  Again, to fully understand how this will affect you and what can be included in you cost basis, talk to your financial adviser or tax specialist.

Also keep in mind that you can deduct your moving expenses if you moved over 50 miles for work, and if your employer did not pay your moving expenses.

Lastly, the Mortgage Debt Forgiveness Act was renewed for the 2014 tax year, so, if you sold your home for less than you owe on your mortgage, that difference may not count as income for tax year 2014.  It is unclear whether Congress will renew this for tax year 2015.

In any case, because home ownership can have a big impact on the taxes you owe, it would be wise to consult a tax accountant to guide you.

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