Tax Relief Blog
Did you buy a new home in Los Angeles, Whittier, Norwalk, Santa Fe Springs, Downey, Pico Rivera, Montebello, Hacienda Heights, La Habra Heights, West Covina, La Habra, Brea, Fullerton, Yorba Linda, Cerritos, La Mirada, Lakewood, Anaheim, Santa Ana, Long Beach, Compton, Torrance, Los Angeles, Pasadena, Beverly Hills, Santa Monica and throughout Los Angeles County, Orange County, Corona, San Bernardino County, Riverside County, the Inland Empire, the San Fernando Valley and the San Gabriel Valley.
If you’re a homeowner, Uncle Sam has thrown you a tax shelter that’s beyond compare. You may deduct the mortgage interest paid on your annual tax return and deduct the property taxes on your Schedule A. If you don’t currently own a home, this tax benefit is significant enough to make you look seriously at home ownership.
Get professional tax preparation help. Our firm prepares, plan and represents taxpayers regarding all tax matters..
Please call us at 562-204-6700 or email us to schedule an appointment.
– Points
The concept is simple, but it starts to get a little more complicated when you add in “points.” Points are one type of fee paid at closing to your lender. If you pay points when you buy your new home, these may be deducted in full in the year of purchase. However, if you refinance your loan, the points must then be deducted over the life of the new loan. In the event you are deducting points annually and then decide to refinance again, you will be able to deduct the balance of the points when you pay off the old mortgage. Of course, all these deductions are based on being able to itemize your deductions on Schedule A.
There are some limitations.
• Points must not be more than amounts generally charged in your area.
• Funds provided at closing must be at least equal to the points.
• Loan must be used to buy or build taxpayer’s main home.
• Points are stated as a percentage of the principal amount of loan.
• Points are clearly stated on the settlement statement as charged for the mortgage.
Predictably, there are limits on mortgage interest deduction. Only the interest on the first $1 million of home acquisition debt is deductible. (Acquisition debt is defined as debt to purchase, build or substantially improve the residence.) Home equity debt limits are the lesser of the fair market value of the home reduced by the acquisition debt or $100,000 ($50,000 if married filing separately).
Probably the greatest advantage of home ownership occurs when you decide to sell your home. If you have owned and lived in your personal residence for two out of five years, you can sell the home and not be taxed on a profit up to $250,000 for singles and $500,000 for couples. The way home values have decreased in recent years, this may seem like a far-off opportunity. However, home sales are on the rise in much of the country. This rule seems very straight forward and simple, but beware! There are a number of exceptions.
Job related move–if you have to move out of your area (a 50-mile radius), and are unable to meet the two year time period, you can prorate the time based on a formula utilizing a ratio consisting of the number of days that you owned and lived in the home to the total number of days in the relevant 24-month period (approximately 730), multiplied by the exclusion amount.
Health problems requiring a sale–if health problems force you to move from your principal residence, you can prorate the time and exclusion based on the formula above.
Ideally, a couple that kept good records of time of ownership could buy and live in a home for two years, sell for a profit and then repeat this process. Still, there are a number of pitfalls that cause tax problems, such as the special rules surrounding home offices and move out/rent/return situations that effect the two in five requirement (this involves adjusting for depreciation recapture).
Given the many regulations and nuances of the tax laws, many people opt to hire a licensed tax practitioner, such as an enrolled agent.
Please call us at 562-204-6700 or email us to schedule an appointment.
Mike Habib EA is an accredited member of the BBB better business bureau with an A+ rating. Mike is also an Endorsed Local Provider – ELP by Former Dave Ramsey ELP 2012-2019, the TV and financial expert. Mike is an active member of CSEA – California Society of Enrolled Agents, and NAEA – National Association of Enrolled Agents.
