Real Estate
For many people, a home is not only a shelter for their family, but also their only real tax shelter available.
The opportunity to reduce your income taxes by deducting your mortgage interest payments, the points you may have paid when taking out your loan, and your real estate taxes is one of the most important incentives for owning a home.
In order to claim the tax breaks for mortgage interest and real estate taxes, you'll need to itemize your deductions. It's important to note that if you're itemizing in order to claim home mortgage and real estate taxes, you'll also be able to claim any itemized deductions for state and local income taxes, charitable contributions, casualty losses, employee business expenses and other miscellaneous deductions that exceed 2 percent of your adjusted gross income (AGI), and medical expenses that exceed 10 percent of your AGI. (The threshold for medical expenses has increased from 7.5 percent in 2012 to 10 percent in 2013. However, it remains at 7.5 percent in 2013 if the taxpayer or spouse is over age 65.) These deductions can save you many tax dollars - and most people who don't own a home can't take advantage of them.
Note that beginning in 2013, taxpayers whose adjusted gross income (AGI) exceeds a threshold amount must reduce the amount of allowable itemized deductions by the lesser of: (1) three percent of the excess over the threshold amount, adjusted annually for inflation; or (2) 80 percent of allowable deductions. However, no reduction is required in the case of deductions for medical expenses, investment interest, and casualty, theft or wagering losses. If you're a high-income earner, it may also be important to consider how separate filing alters the impact of the limitation on itemized deductions faced by high-income taxpayers. The thresholds for 2013 are $250,000 for unmarried taxpayers, $300,000 for married filing jointly and surviving spouses; $275,000 for heads of households; and $150,000 for married filing separately. As adjusted for inflation, the thresholds for 2014 are $254,200 for unmarried taxpayers, $305,050 for married filing jointly and surviving spouses; $279,650 for heads of households; and $152,525 for married filing separately.
If you sell your home, generally the first $250,000 in gains on the sale will be tax-free (the first $500,000 will be tax-free if you are married filing jointly), provided that you meet certain requirements. Unfortunately, losses on the sale of your personal residence are generally not deductible, unless you used part of the property for business purposes or rented it out.
Finally, for those of you who own investment real estate, we'll discuss the rules related to reporting rental income and deductions, and handling the purchase or sale of rental property, including second homes.
For more information, see any of the following:
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