Many people have the dream of owning their own home. Growing up we are told to go to school, get a degree, get a great job, start a family, and buy a house. Home ownership has it’s many advantages and for some people, disadvantages depending on the individual.
Today we will be interviewing Mitchell Pruitt, CPA of Wally V Cordell Accounting. Mitchell’s company focuses on offering a wide range of services to individual and business customers. The services they provide range from tax return preparation, tax consulting, payroll services, bookkeeping, business consulting, financial planning, and more. They offer a personalized customer service experience that is hard to match. Feel free to visit www.WVCAccounting.com for more information.
Let’s see what Mitchell has to say about tax benefits of owning your own home and what is in store for us as the tax reform takes effect.
Q: What are some of the basic deductions available to homeowners today?
A:There are many different home-related expenses which you can deduct on your tax return to reduce your taxable income. These expenses come in the form of itemized deductions. Itemized deductions are claimed on a taxpayer’s Schedule A and will replace the standard deduction each taxpayer has the option of claiming. The following expenses qualify and can be deducted:
Real Estate Taxes
Mortgage Loan Interest on up to $1,000,000 in Mortgage Loans
Home Improvement Loan Interest (lumped in with mortgage loan interest limitation)
Mortgage Points (each point is equal to one percentage of the loan amount)
Home Equity Line of Credit Interest on up to $100,000 in HELOC Loans
*It is important to note that these expenses are not limited to only one home. If you own a second home or even a vacation home, then the expenses listed above are available for that home as well.
Moving Expense Deduction
Homeowners who move to a new job location that is 50 miles or more from their previous living situation, may qualify for a residential moving cost deduction as well. This rule applies to self-employed individuals as well as to regular company employees and allows the taxpayer to claim the moving expenses as a deduction separate from the other itemized deductions. In other words, you would be able to claim this deduction regardless of whether you choose to itemize or take the standard deduction.
Q: Are we at risk of losing those benefits with the tax reform?
A:The proposed tax reform will only affect the mortgage loan interest portion of the itemized deductions listed above. Currently taxpayers can deduct the loan interest on mortgages totaling up to $1,000,000. The proposed changes would lower the maximum mortgage loan amount to $500,000. For example, if a taxpayer had a $1,000,000 mortgage loan at 5% interest, then they would be able to deduct $50,000 ($1,000,000 x 5%) in mortgage interest under the current system, but would only be able to deduct $25,000 ($500,000 x 5%) in mortgage interest under the newly proposed system. Although this change would affect many taxpayers, it is important to keep in mind that this change would only affect you if the mortgage loan on your home would be in excess of $500,000. Otherwise, this proposed change wouldn’t lower your deductions at all.
Q: Are there any other credits for improving your home?
A: Taxpayers who upgrade their homes to improve energy efficiency or make use of renewable energy may be eligible for tax credits to offset some of the costs. Most of these credits expired in 2016, but fortunately for home owners, the solar tax credit, also known as the investment tax credit (ITC), was extended through 2021. Here is a brief rundown of the federal solar tax credit:
The U.S. government offers a Solar Tax Credit, 25D, for homeowners who purchase and install equipment that uses solar energy to generate electricity.
This credit allows you to deduct 30% of the cost of installing a solar energy system from your federal taxes and there is no cap on its value.
The ITC applies to both residential and commercial systems, but is not eligible for taxpayers that rent their homes.
The IRS will allow taxpayers to claim the credit as soon as the construction of the system begins, so taxpayers don’t need to wait for the system to be fully installed.
You can claim the credits by filing Form 5695 with your tax return.
Even if you don’t have enough tax liability to claim the entire credit in one year, you can “roll over” the remaining credits into future years for as long as the tax credit is in effect.
Q: What other benefits are there to owning your own home?
A:One of the biggest perks of owning your own home is the Home Sale Tax Exclusion. This tax exclusion is the biggest benefit to owning your own home and is why most CPAs would recommend that taxpayers buy their own homes. The Home Sale Tax Exclusion allows taxpayers to exclude up to $500,000 ($250,000 if single) of capital gains from the sale of their homes. It is a safe bet to assume that over time your home is going to appreciate in value, so this exclusion could translate into major tax savings when you ultimately sell your home at a gain. The beauty of this exclusion is how easy it is to qualify for and that it can be used multiple times by the same taxpayer. To qualify for this exclusion, the taxpayer must meet both the Ownership Test and the Use Test set by the IRS. Taxpayers meet both of these tests if they have owned and lived in the home they are selling for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods as long as you meet both tests during the 5-year period leading up to the date of the sale. This exclusion can be used multiple times, but cannot be used twice within a two year time period.
Taxpayer 1 and Taxpayer 2 buy their home in 2010 for $200,000 and use this home as their main residence until January of 2018 when they decide it’s time to sell. They would meet both the Ownership and Use Tests since they have lived in and owned their home for at least 2 of the last 5 years and would therefore qualify for the Home Sale Tax
Exclusion. If the taxpayers were to sell their home for $500,000 in 2018, then they would normally have to recognize a capital gain of $300,000. However, because they qualify for this exclusion, none of this capital gain is taxable. At a typical capital gains tax rate of 15%, this would result in tax savings of $45,000 ($300,000 x 15% = $45,000) for the taxpayers!
As you can see, this exclusion can have major tax benefits to any taxpayer that owns their own home and is one of the biggest tax benefits made available by the IRS today.
I want to thank Mitchell for taking some time to help us understand the tax benefits available to us today and what is in store for us with the tax reform. If you would like to reach out to Mitchell Pruitt with any questions or assistance with your personal or business taxes, then feel free to contact him at 239-319-5888. Wally V. Cordell Accounting is in Estero, FL at 19910 S. Tamiami Trail Suite D in the Gulf Professional Center.
If you or someone you know is looking to buy, sell, or invest in real estate give Jordas Reyes of The Pro Scout Group at Keller Williams Realty Naples a call at 239-919-4081.
The most recent proposals within the Tax Cuts and Jobs Act have proposed changes affecting the following areas:
- The Home Sale Tax Exclusion
- The amount of gain that can be excluded under this provision would not change, but the years required to qualify would be increased. A taxpayer previously had to own and use a home as their primary residence for 2 out of the previous 5 years to qualify, but the proposed legislation would change these qualifying numbers to 5 out of the previous 8 years to qualify.
- Home Mortgage Interest Deduction
- The previous legislation allowed taxpayers to deduct mortgage interest expenses on up to two homes, but the most recent proposals would limit the deductions to only being able to apply to one residence.
Everything else within the article has remained unchanged and we will keep you up to date on any further changes that may arise as they finalize the new legislation.
Mitchell Pruitt CPA
Wally V Cordell Accounting LLC