Real Estate Tax Deductions
Mortgage Interest
Many taxpayers enjoy the ability to use the interest expense from their mortgage as a tax write-off. On Schedule A of your tax return, this interest is usually deductible as an itemized deduction. There may be some limits on the amount of deduction for those taxpayers with high income. For 2007, if your joint adjusted gross income exceeds $156,400, you will have to reduce your home interest deduction by 3% of your income over $156,400. This amount is increased to $159,950 for 2008.
Points and origination fees on a home purchase are also deductible. According to the IRS, however, points and fees for refinancing an existing home loan can only be written off over the term of the new loan. If you had a short-term balloon as your original loan, then you could deduct points and fees when you refinance with a permanent loan. Points can also be deducted on home equity loans if the loan is used to finance home improvements. You must also pay for the points and fees from your own funds in order to deduct them in the current year.
Moving Expenses
If you have recently moved because of your job, you may deduct your moving expenses. Your new job location must be 50 miles further from your your previous home in order to qualify. Storage and transportation of household goods and travel expenses to the new location are deductible. House shopping trips, purchase or lease costs, and temporary living expenses have not been deductible for about 15 years. Moving expenses reimbursed by your employer are not included as taxable wages.
You must also continue to work at your new job location for at least 39 weeks during the 12-month period following the move. This period can be waived if you transfer for your employer's benefit or if you are let go for any reason other than willful misconduct.
Rental Houses
If you rent your property, you will probably need to report rental income and expenses on Schedule E of your tax return. The following are all possible rental deductions: maintenance, repairs, advertising, taxes, tax depreciation, mortgage interest, insurance, and any other ordinary and necessary rental expenses. The IRS will require that your tax basis in the house be reduced by the allowable depreciation whether you claimed it or not.
If you have a rental loss after deductions, then you must consider the passive activity loss (PAL) rules which limit rental losses for tax purposes. If you actively participate in rental activity, you may write off up to $25,000 of rental losses. Actively participating means taking part in decisions related to the renting of the property. PAL tax rules are very complex, however, so you should consult with a tax advisor concerning their application.
Sale of Your Home
You can write off up to $250,000 of profit from the sale of your home. This rule can be used as often as as every 2 years. You must have owned your home and used it as your main residence for at least 2 out of 5 years to qualify. If both you and your spouse meet the previous requirements, then up to $500,000 of gain from the sale of the residence can be excluded on their joint return.
*Please note that all information is general and should not be acted upon without advice from a tax professional, and that we will not be held liable for any connection with its use.
*Tax information provided by David Parker, CPA, P.C. For more information, visit www.dparkercpa.com.