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© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Learning Objectives Define and list examples of income tax deduction benefits of home ownership Define, and be able to calculate, basis, adjusted basis, amount realized, and gain realized in the sale of a personal residence
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Tax Deductions for Home Owners Real property taxes: Taxes on real property are deductible for income tax purposes in the year paid Assessments are not deductible Assessments may be added to the basis of the property, reducing the gain that must be claimed when the property is sold
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Tax Deductions for Home Owners Mortgage interest: Often a major advantage of home ownership Savings depend on: Amount of interest paid Taxpayer’s income bracket Amount of the minimum standard deduction versus Number of itemized deductions the taxpayer claims: Note: Real Property taxes and mortgage interest are the only 2 deductions provided by homeownership Recent trends of lower mortgage interest rates and higher minimum standard deductions have reduced or eliminated some tax savings for those with lower incomes and small to moderate mortgage interest payments
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Tax Deductions for Home Owners Mortgage interest: Two types of debt which generates deductible interest: 1.Acquisition debt is the debt incurred in the purchase of a personal residence. The interest generated on the first $1,000,000 is deductible 2.Equity debt is all debt secured by a qualified residence to the extent it does not exceed the fair market value of the residence reduced by the acquisitions debt. The interest generated by the first $100,000 is deductible
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Sale of a Personal Residence Basis Capital Gain: Profit from the sales of property Used to determine tax liability Capital Losses: Losses on the sale of a home May not be deductible Capital Improvement: Items that are permanent and will increase the value of the property
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Sale of a Personal Residence Basis Basis: The amount originally paid for the property. Typically the purchase price Acquisition debt is the debt incurred in the purchase of a personal residence. The interest generated on the first $1,000,000 is deductible. Adjusted Basis: Original costs incurred as a result of purchasing and acquiring title to the property and cost of capital improvements Amount Realized: The amount realized is the sales price minus allowable expenses of sale Costs of Acquisition: Allowable costing costs
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Effect of Purchase and Sale Expenses that may effect the taxable gain Title Insurance Premium Transfer Tax Attorney’s Fees Deed Preparation Closing Costs Discount Points Loan Origination Fee Other expense items such as surveys, recording, etc. Commission Fix-up Costs Moving expenses Financial Penalty
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Rules for Taxation of Capital Gain $250,000/$500,000 home sale exclusion: Taxpayers Relief Act of 1997, replaced both the over 55 rule and the rollover rule Anyone who has owned and occupied a primary residence for two out of the five years prior to selling it can exclude a gain up to $250,000 Ownership and occupancy requirements do not have to be met concurrently A married couple filing jointly receives a $500,000 gain exclusion if both meet the occupancy requirement If one spouse dies, the other spouse can sell the property in the same year as the death and claim up to the $500,000 exclusion In the event of unforeseen circumstances such as a change in health or employment, a prorated portion of an individual or married couple’s exclusion can be used to shield gain from taxation May not exclude the gain on the portion of the property attributable to the home office
© OnCourse Learning. All Rights Reserved. Federal Taxation of Home Ownership Special Rules That May Apply to Some Residential Transaction Installment Sales Like-Kind Exchanges Vacation Homes Home Office
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