Photograph by Paul Myers
Realtors Jan and Tom Gallagher of Coldwell Banker inform their clients about benefits for first-time homebuyers and long-time homeowners 55 and older.
Exploring the tax benefits of owning a home
Tax time is just around the corner, and homeownership can be a real benefit when it comes to deductions. For first-time homebuyers, as well as those over the age of 55, understanding the tax benefits of owning instead of renting or what options are open for transferring property tax, for instance, can save significant dollars.
A recent report by the bipartisan Joint Committee on Taxation estimates homeowners will take advantage of $66.5 billion in mortgage interest deductions, $21.4 billion in local property tax write-offs, and $14 billion in tax-free home sale profits during the coming fiscal year. That's a total of approximately $102 billion in annual tax benefits for people who own their own homes.
Tax benefits of owning a home add up, according to Realtor Kathy Stakey with Coldwell Banker in Saratoga. She advises first-time buyers to do the math on how much rent one has paid in contrast to how much money could have been paid on the purchase of their own home. On top of tax deductions, building home equity over time is an advantage over renting and increases the value of their investment.
In addition to deductions for certain real estate or property taxes, homeowners can deduct mortgage interest fees. To be deductible, the interest paid must be on a loan secured by the homeowner's main home or a second home. The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Certain deductions may be available as part of the settlement or closing statement from the purchase of a home as well. However, it's best to consult with a qualified professional to understand all the intricacies of preparing a tax return and determining deductions for individual situations.
Firs- time homebuyers are also encouraged to keep full and accurate records to properly report income and expenses, to support deductions and to know the basis or adjusted basis of a home. Basis is the starting point for figuring a gain or loss and is important when selling a home in the future. The Internal Revenue Service recommends keeping records that include the purchase contract and settlement papers, as well as receipts, cancelled checks, and similar evidence for improvements or other additions as well as any decreases in the basis of a home. The IRS publishes guidelines for first-time homeowners that can be downloaded from www.irs.gov. The publication, "Tax Information for First Time Homeowners," includes a checklist for recording home improvements and explains what is and is not deductible.
What income bracket a homeowner falls into also determines what kind of benefits are received. Last year, for example, only 6 percent of the $64.5 billion in mortgage interest deductions went to homeowners earning $50,000 or less, while owners that earned more than $100,000 made up the remaining 62.7 percent since lower income households usually accept the standard deduction instead of itemizing.
Those with higher incomes also are better positioned to take advantage of capital gains tax exclusions on profits on the sale of a home, provided it was owned and used as a principal residence for at least two of the five years preceding the sale. Congressional reforms in 1997 and 1998 led to tax codes that allow taxpayers to exclude up to $250,000 for single filers or $500,000 for joint filers.
"While we usually leave the details on deductions to the tax advisor, Realtors discuss the benefits of mortgage interest deductions and capital gains exclusions with their clients," said Mary Prochnow of Mary Prochnow Realtors in Los Altos. "This comes up most particularly with first-time homebuyers who may not be completely aware of the great benefits available to them."
In addition to first time buyers, long-time homeowners in Santa Clara County may be able to tap into another tax saving benefit. Thanks to Proposition 90, homeowners 55 years or older can transfer the tax base on a present home to a newly purchased home that is equal to or less than the selling price on the old home.
The husband and wife team of Tom and Jan Gallagher, Realtors with Coldwell Banker in Los Gatos, keep a copy of the criteria for Proposition 90 on hand at open houses so they can inform buyers of this benefit. As an example, Tom Gallagher described a typical situation.
"A couple bought a home in Saratoga 20 years ago for $250,000 and their tax base is about $3,200, which they have carried for the 20 years. Now he turns 55 and sells his home for $1.2 million and buys a townhome for $600,000 in Los Gatos. If he was not 55, he would have to pay a tax base of about $7,200 per year. But, he can transfer the old base of $3,200 to the townhome. Many seniors are not aware of this proposition," said Gallagher.
There is paperwork to fill out with the County Assessors Office and the tax relief can only be granted once, except in certain defined circumstances. So far, only nine other counties in the state have adopted Proposition 90. Gallagher advises checking the provision out if moving out of Santa Clara County. The following counties have approved Proposition 90 and will currently accept a factored base year value transfer from another county: Alameda, Kern, Los Angeles, Modoc, Monterey, Orange, San Diego, San Mateo, Santa Clara and Ventura.
While Realtors are able to provide general details about the tax benefits of owning a home, the Silicon Valley Association of Realtors recommends consulting a tax professional when it comes to tax matters. The nonprofit trade organization is comprised of 3,000 members representing Realtors in Santa Clara and San Mateo counties, from Los Gatos and Saratoga to Menlo Park and Atherton. For more information, check out www.siliconvalley-realtors.org.
Saratoga, California Since 1955
