Mortgage 101 - Things You Should Know About Your Mortgage Loan
Home Buyer Tax Advantages
Think of it as Uncle Sam helping you make each monthly payment.
In general, interest you pay on loans secured by your home -- including first and second mortgages -- and property taxes are deductible.
Buy a home with a $135,000 30-year FHA mortgage at 7% and the interest you'll pay totals $9,406.56 in the first year plus you'll pay about $3,375 in property taxes. That doesn't sound so great, but here's what you'll save.
Tax savings total $3,578.84, or $298.24 per month. That's a substantial amount! The total payment on this mortgage, taxes and insurance included, is $1,298.64. The effective after-tax payment is only $1,000.40.
Doesn't that make owning a better proposition than trying to rent the same quality house or apartment?
As a homeowner you have one of two choices. First, work with your tax advisor to see how much you should adjust your withholdings so you take more home from each paycheck. Or, you can continue as you are and get a large tax deduction each year. (Remember, the last choice means you are loaning the government money interest free.)
Capital Gains Information
Your home is truly your greatest shelter -- from taxes.
Most people no longer have to weigh the possible effects of capital gains taxes when selling a home and deciding whether to buy again or rent or move into a less expensive market.
Since May 7, 1997, federal law has greatly reduced any threat that you'll pay taxes on capital gains from the sale of your home. Couples can earn up to $500,000 in tax-free profits on the sale of their home. Single filers can earn up to $250,000 in tax-free gains.
Before, homeowners had to roll any gains from the sale of a home into another home of equal or greater value. People over 55 also got a one-time break of $125,000 ($250,000 for couples) so they could trade down to less-expensive homes more suited to the needs of a mature family.
How do you qualify?
You or a spouse must have occupied the home as a primary residence for two of the past five years. If you don't meet the two-year benchmark, you may be able to deduct or prorate taxes if the move was to a new job, for health or other circumstances the IRS accepts as reasonable. (Hmmm, that's a thought.)
Widows and widowers won't likely have to pay capital gains tax either. The law sets the tax basis for the sale as the value in the year of death of the spouse. A home for $25,000 in the '50s that is now worth $500,000 could be sold above that price without any capital gains being realized. The IRS recognizes $500,000 as the basis for determining the tax.
How much was that toilet you repaired 20 years ago?
Long-term homeowners who have rolled over profits from many sales could conceivably face capital gains to the extent that the profit on the last sale exceeds their tax basis. The gain will be taxed at 20% until 2001 when the rate drops to 18%. But since the holding period must be five years, the reduced rate can't really be taken advantage of until 2006.
What is the tax basis?
Great record keeping is key to reducing any potential tax incurred on a home sale. The tax basis begins with the cost of your first home. Then add costs of sales, like Realtor commissions, costs of acquisition, costs of repairs within 90 days of closing to prep the home for sale, and the costs of capital improvements, like an addition or kitchen remodeling.
Losses from the sale of a personal residence still can't be deducted. Your best bet is to rent the property out. You'll get to deduct operating expenses and take depreciation. You may get a better price later. If not, some of the loss could be taken as a business expense when you sell