TAXES TIPS AND YOUR HOME

By Tricia Morris,
President, Premiere Mortgage

It’s never to early to plan for your taxes, and while April 2005 may seem a long way off, savvy homeowners know that the way to ensure a fair payment in the spring is to beginning planning now.

Here are a few tips I have gleaned from various sources that may be of value. It’s important to remember that any tax information may vary according to your individual situation, and that you should check with your accountant, lawyer or other tax professional before making any financial decision that might affect your tax planning.

Under the Taxpayer Relief Act of 1997, taxpayers can fully exclude from taxable income up to $250,000 of gain ($500,000 for married couples filing a joint return) on the sale of their principal residence. This exclusion can be taken once every two years. There is no once-in-a-lifetime provision in the law. The home seller must have owned and occupied their principal residence an “aggregate” of two of the five years before its sale.

Under this law, the taxpayer’s tax basis of his/her principal residence is relatively unimportant—unless the taxpayer makes a profit that exceeds $250,000 or $500,000. Under the law, if you have lived in the home for at least two years, all your profit is tax-free.

One lesser-known aspect of this tax deduction is that it has no age restrictions. There are also limited exemptions to the restriction on use more than once every 24 months due to job location change (qualifying for the moving cost tax deduction), health reasons, and unexpected situations such as divorce, and multiple births. See your tax advisor for full details.

While it is understood that mortgage interest and property taxes are tax deductible, so too is the loan fee, or “points” paid to obtain a mortgage. Each point equals one percent of the amount borrowed. You can also deduct any pro-rated property taxes and mortgage interest listed on your closing statement when you purchase a home

Another tip is to pre-pay your January mortgage payment in mid-December and claim the extra interest deduction on your income tax return. Be sure the mortgage lender receives your payment in time to report it on your IRS 1098 form, which you should receive in January.

If possible, you may be able to prepay your property taxes due in the following year before December 31, and deduct the early tax payments on your income tax return. This is not possible in all jurisdictions and if you have a mortage escrow impound account with your mortgage lender, prepayments into your escrow account won’t entitle you to any extra tax deductions. For more details, please consult your tax advisor.
Thinking about a 1031 tax deferred exchange? Remember that all properties involved in an Internal Revenue Code 1031 tax-deferred exchange must be located within the United States. Finally, even Time-sharing arrangements may be considered qualified residences as long as the taxpayer does not lease their use.

One highly rated source for these and other real estate tax situations can be found in “The Real Estate Investors Tax Guide,” by Vernon Hoven CPA (Dearborn Real Estate Education Company, Chicago), available in bookstores and www.amazon.com.

Premiere Mortgage has offices in Kihei and Kahana. Tricia Morris may be reached at 874-8800. Call or drop by for a free consultation.

Return