5 homeownership tax myths
"Now the law rewards people who sell frequently. In this current market, people who sell every couple of years can get and keep their gain," Luscombe says. "But people who buy and hold might find they have reached the point where the gain exceeds the exclusion."
That means they face unexpectedly high tax bills, even at the lower 15-percent capital gains rate. The profit could also push them into a higher overall tax bracket, meaning they would make too much to claim some deductions, credits or exemptions. They also might even end up owing alternative minimum tax.
Another problematic consequence, says Luscombe, is that when the new rules took effect, people basically quit keeping records related to their homes.
"They thought: Since we're never going to be taxed on the sale, there's no need to keep track of what we paid and what improvements we made," he says. The improvements add to your home's basis, which you subtract from the sale price to determine your profit and whether any of it is taxable.
"Now with inflation in the housing market, a lot of people are selling homes in excess of the gains without any way to show that their tax bill should be less," says Luscombe.
4. Putting my child on my home's title is a smart tax move.
Worries about taxes on a residence sometimes lead homeowners to fall for this myth. It's a particularly tricky one, because it combines confusion about residential taxes with the even more complex estate-tax area.
"Sometimes we'll hear about taxpayers who, in doing some quick back-of-the-envelope estate planning, decide to put their home in the children's names," says Tollaksen. "The thinking is: My son or daughter won't have to worry about this when I die."
The goals: Avoid probate, keep the home in the family and get the property out of the parent's estate for those tax purposes. Such a move, however, could produce other tax problems for your children.
Unless the child moves into the newly deeded house with the parent and lives there long enough (two of the previous five years) to make the house the child's main residence, too, says Tollaksen, the son or daughter won't get the $250,000 or $500,000 residential tax break when the child later decides to sell. Without establishing primary residency in the house, either before or after the parent passes away, the child's ownership is viewed as an investment property.
Other parents opt to simply add a child's name along with theirs on the title to the house, known legally as a joint tenancy. It doesn't mean that all the owners live in the home, but simply that two or more people hold title to the property.
This, too, can produce tax complications.
|-- Updated: Jan. 24, 2008