Buying Or Selling a Home? Learn About the Tax Consequences First

Are you thinking about Buying or Selling a Home? The following article will
give you the facts so you can make a wise decision.


Buying a Home


If you’re like most people, your home is the largest
investment you’ll make in a lifetime. It’s a longterm
investment that plunges most homeowners
into instant debt, but it also provides ongoing tax
deductions, such as mortgage interest and property
taxes. To take full advantage of these deductions,
it’s important to keep accurate records of your
expenses. In addition to the purchase price, you
should keep the following on file:

• Closing costs, such as abstract fees, title and
search fees, recording fees, survey fees, and
transfer taxes.

• Points paid, loan origination fees, maximum
loan charges, loan discount or discount points.

Generally points paid at closing are deductible in
the year of purchase, regardless of who pays them,
unless you elect to amortize them over the term of
the loan.

Tax Deductions

Many new homeowners expect a new home to
lower their taxes. Some are disappointed to find
out that they can’t itemize deductions in the first
year because they only incur mortgage interest and
property taxes for part of the year.

• The lending institution will issue Form 1098
showing interest paid for the calendar year.

• For mortgage balance(s) of less than
$1,000,000 ($500,000 if filing separately) you
can deduct the mortgage interest for your main
home and a second residence. In order for the
mortgage interest to be deductible, the loan
must be secured by the home.

• If the home is not the security for your loan
(i.e., if you borrowed money from a relative),
you cannot deduct the interest.

• Generally, points paid for the purchase of the
main home are currently deductible. Points
paid on a second residence must be amortized
over the term of the loan.

• You can arrange for a home equity loan of up
to $100,000 and still deduct the interest.

Note: Exceeding these limitations will result in a
limited interest deduction.



• You can deduct assessed property taxes in the
year you pay them, even if you saved monthly
in an escrow account.

• In the year of transfer, each party is liable for
part of the property taxes.


• Back taxes you pay on the property become
part of your acquisition cost rather than a
current deduction.


Home Improvements

Homes require upkeep. Some of the work is
ordinary maintenance, and some is expended to
make improvements. It’s important to keep track
of the amounts spent on improvements by keeping
the receipts. These expenses increase the total cost
invested in your home. If the upkeep increases
the value, rather than maintains the value, it is
considered an improvement.

• Normal painting and wallpapering are repairs
unless done as part of a renovation project that
increases the home’s value as a whole.

• Fixing the roof may be a repair, but replacing it
is an improvement.

• Some examples of other improvements include
landscaping, a new driveway, new windows,
fencing, or adding a storage shed.

Selling a Home

• When establishing a selling price, factor in the
cost invested in your home.

• To calculate your gain or loss on the sale,
you’ll need the cost invested.

• If the sale results in a loss, it is a nondeductible
personal loss.

• If the sale results in a gain, you may be able to
exclude the gain up to $250,000.

• You must own and use the property as a
principal residence for at least two of the last
five years to take advantage of the exclusion.

You couldn’t have used the exclusion for
any house sold in the previous 24 months. A
reduced exclusion is available if you had to
sell the home because of a job change, health
reasons, or unforeseen circumstance.

• The excludable gain increases to $500,000 if
you are married and lived with your spouse in
the house for two of the previous five years.

• If you used any portion of your house for
business or rental at any time since May 7,
1997, some of the gain will be taxable.

• For sales after December 31, 2008, the
exclusion does not apply to any gain allocated
to periods of nonqualified use.

• You are not required to exclude the gain on
your residence; you may make the election not

to exclude by paying tax in the year of sale. You
might consider this if you plan to sell another
residence that would qualify for the exclusion
within two years and the gain would be larger.

• Planning is important. If you have high income
and large taxable gain on the sale, you may
want to receive payments under the installment
sale method. By doing so, only the gain from
payments received in the current year would be
taxable. (If you need the proceeds right away,
this option is less desirable.)

• You may want to consider receiving the entire
proceeds, paying the tax, and investing the money.

• Your tax professional or investment consultant
can help you weigh your options.



Divorce

• Often the ownership of a home changes with
divorce. The home may be sold to a third party
or become the sole property of one spouse.

• If one spouse receives the house, no sale
occurs for tax purposes. The cost of the house
stays the same despite paying money to the
other spouse.

• If the home is sold, each owner must
report the sale. If the title is shared, both
will report their portion of the sale on their
individual returns. If one spouse took over
ownership, that spouse has the sole reporting
responsibility despite a decree that may assign
a portion of the proceeds to the ex-spouse.

• If joint ownership is retained after the divorce,
both spouses may be able to take advantage
of the $250,000 exclusion. Ownership and
occupancy by one taxpayer will also qualify the
ex-spouse.


Physical or Mental Incompetency


• The exclusion may still apply if you become
physically or mentally incapable of self-care and
have occupied the home for at least 12 months
out of the past 60 months. Time spent in a
nursing home is counted as occupancy of the
residence in order to exclude the gain on sale.

You must maintain ownership during this period.


Summary




• Coupled with potential tax deductions, home
ownership is now more rewarding than ever
before.

• Consulting your tax advisor can be to your
advantage when making home ownership
decisions.



This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.


#808 – © Copyright May 2010

National Association of Tax Professionals