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Home ownership pays off at tax time

June 26, 2009|By JIM WOODARD, Creators Syndicate

Many homeowners recently filed their 2008 income tax return. All those ownership-related tax deductions probably gave many of them a new appreciation for their investment in a home.

This is a good time to review those homeowner tax-related advantages. The three most important are:

o Deductions for mortgage interest.

o Deductions for real estate taxes.

o Capital gains exclusion for the sale of a principal residence.

Deducting mortgage interest and real estate taxes reduces the homeowner's tax liability, said a report from the National Association of Home Builders. Homeowners who itemize can deduct from their taxable income all interest allocable to a first or second home for up to $1 million of mortgage debt and $100,000 of home-equity loans. Most state and local property taxes are also deductible.

When a home is sold, the capital gains exclusion can provide homeowners with a tax benefit, said the NAHB report. Under present law, those who sell their principal residence need not pay federal income tax on profits up to $500,000 for married couples and $250,000 for individuals. With capital gains tax rates expected to increase from 15 percent to 20 percent in coming years, these tax savings can be substantial.

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For a married couple with an income of $80,000 per year and an initial mortgage amount of $250,000, the savings from mortgage interest and real estate tax deductions can save a couple more than $11,000 in the first five years of ownership, NAHB economists estimated. Assuming a couple owns a home for 12 years, these savings grow to more than $25,000 in that time.

Combined with the capital gains exclusion, the estimated tax savings for the entire period of ownership exceeds $52,000.

For a couple with an income of $60,000 and an initial mortgage of $180,000, the five years of tax savings total more than $6,000. Total savings over a 12-year period are estimated to be more than $33,000.

Combining those savings with the $8,000 first-time home buyer tax credit (www.federalhousingtaxcredit.com) available for homes purchased before Dec. 1, home buyers have an outstanding investment opportunity.

Q: Are families becoming more interested in buying a home?

A: Apparently so. About 23 percent of American families plan to purchase a home within the next five years, according to a survey commissioned by Move Inc. About half of those surveyed are first-time buyers. Even repeat buyers are expressing more interest in buying a home.

The survey revealed about 19 percent of current homeowners plan to take advantage of the government's program to help prevent foreclosures. Despite challenging economic times, about 18 percent of prospective home buyers plan to buy this year. A key reason is the $8,000 tax credit passed into law by Congress as part of the economic stimulus package.

Q: Is it a good idea to consult with a "mortgage modification expert?"

A: In most cases, it's a bad and expensive idea. A rapidly growing number of individuals and firms are touting themselves as modification experts. Many charge hefty upfront fees to obtain their services. "We are anticipating over $1 million in fees billed this quarter," bragged one modification firm. Yet their service is often minimal.

Q: What proportion of homeowners are having mortgage-related problems?

A: Currently, more than 11 percent of homeowners nationwide are either delinquent or in foreclosure, according to the Mortgage Brokers Association. That translates to problems and frustration for a lot of people, and to buying opportunities for others.

About 1.5 million homes are at risk of foreclosure, the association reports. Many are on the market at modest prices, boosting home affordability rates nationwide.

Copyright 2009 Creators Syndicate Inc.

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