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sweet homeownership tax breaks | | |
| And points paid on a loan secured
by a second home or vacation residence, regardless of how the cash is used, must
be amortized over the life of the loan.
Taxes
The other
major deduction in connection with your home is property taxes. A
big part of most monthly loan payments is taxes, which go into an escrow account
for payment once a year. This amount should be included on the annual statement
you get from your lender, along with your loan interest information. These taxes
will be an annual deduction as long as you own your home. But
if this is your first tax year in your house, dig out the settlement sheet you
got at closing to find additional tax payment data. When the property was transferred
from the seller to you, the year's tax payments were divided so that each of you
paid the taxes for that portion of the tax year during which you owned the home.
Your share of these taxes is fully deductible. A word of caution:
If your settlement statement shows any money you paid into an escrow account for
future taxes, this amount is not deductible. You can only deduct the taxes in
the year your lender actually pays them to the property tax collector. For
example, you bought your house on July 1. Your property taxes are due each Jan.
1. When you closed, the seller had already paid the year's taxes of $1,000 in
full so you reimburse the seller half of his annual tax payment to cover your
ownership of the property for the last six months of the year. Your $500 reimbursement
to the seller is shown on your settlement documents. The closing
document also shows you pre-paid another $500 to the lender as escrow for the
coming year's taxes due next Jan. 1. The $500 you reimbursed the seller at closing
is deductible on this year's tax return, but the $500 held in escrow is not deductible
until it is paid the next year. When
you sell
When you decide to move up to a bigger home, you'll be able
to avoid some taxes on the profit you make. Years ago, to
avoid paying tax on the sale of a residence a homeowner had to use the sale proceeds
to buy another house. In 1997, the law was changed so that up to $250,000
in sales gain ($500,000 for married joint filers) is tax free as long as the
homeowner owned the property for two years and lived in it for two of the five
years before the sale. If you sell before meeting the ownership
and residency requirements, you owe tax on any profit. The IRS provides some tax
relief if the sale is because of a change in the owner's health, employment or
unforeseen circumstances. In these cases, the tax-free gain amount is prorated.
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