5 homeownership tax myths
Or, as Bob D. Scharin, senior tax analyst and editor of Warren, Gorham & Lamont/RIA's monthly tax journal "Practical Tax Strategies," puts it, "Every deductible expense you incur may not produce a deduction."
2. All costs related to my home are deductible.
There are no two ways about this one. It's flat-out false.
"Some buyers think, hope, they can write off everything connected with the house," says Tollaksen. "Not so. Association fees and property insurance costs are not deductible."
Neither, in most cases, is private mortgage insurance, which your lender probably required if your down payment was less than 20 percent. However, a new law changes the deductibility of PMI for mortgages originated or refinanced between Jan. 1, 2007, and Dec. 31, 2009.
If you got your mortgage and policy in that time frame, you might be able to deduct your insurance premium payments. The law also extends beyond private insurance to others, including FHA, VA and rural housing.
There are some limits, though. The PMI deduction is phased out for taxpayers with adjusted gross incomes exceeding $100,000 and is totally elimitnated once AGI reaches $110,000.
Don't try to deduct basic maintenance, repair or home improvement costs either.
Tollaksen says, "I've had people say, 'I put a new roof on my home; can I deduct that?' No."
If you try to write off these expenses, expect to hear from the Internal Revenue Service and to pay a higher tax bill (and possible penalties and interest) after you refigure your taxes without the disallowed deductions.
However, you still need to keep track of these expenses.
"If you convert the home to rental property or sell it," she says, "these costs will affect the property's tax basis."
A home's basis is critical when it comes time to sell. And selling is also a tax area in which many people fall for myth No. 3.
3. I must use money from my home sale to buy another residence.
This used to be the only way to get around a tax bill on a home sale. Even then, you were only able to defer taxes by purchasing a new residence of equal or greater value with the profits from your other house. When you sold your final house, you'd owe those long-deferred taxes you had rolled over throughout the years. Home sellers age 55 or older were allowed a once-in-a-lifetime tax exemption of up to $125,000 in sale profit.
But on May 7, 1997, home-sale tax law changed. Still, almost a decade later, many homeowners are confused about the tax implications of selling.
"I recently heard some neighbors talking about having to buy another house when they sell to avoid the taxes," says Scharin. "If the last time you sold the house was before 1997, you're thinking of those old rules."
Don't worry. Most taxpayers still get a nice break. Now, if you live in the house for two of the five years before you sell, the IRS won't collect tax on sale profit of up to $250,000 if you're single or $500,000 if you and your spouse file a joint return.
"The law change has really affected people's behavior," says Luscombe. "Before, it didn't really matter much whether you sold frequently or held onto your home for a long term. You, basically, could roll over the gain into a larger home and people could avoid tax until they sold for the final time without putting it into a replacement home.
|-- Updated: Jan. 24, 2008