If I sell my home, will I have to pay any income taxes at that time?
Generally speaking, no. In 1997 the laws for selling personal residences were changed. The “once in a lifetime exclusion” was repealed and Congress replaced that law with a new one. According to the new law, anyone who has owned their home and lived in it as a personal residence for two of the past five years can exclude up to
$250,000 worth of gain ($500,000 for married couples) upon the sale of that home.
For most people, their homes are their largest investment.
Therefore, there are real tax benefits to improving and maintaining your home. Price can yield higher, tax-free gains in the future. The resulting higher sale
How often can I do this?
You are allowed to use this exclusion once every two years. One innovative way to create some tax-free income is to buy a house that needs some improvements, remodel it, live in it two years, then sell it. The profits from the sale would be tax-free. And there is no limit to the number of times you can do this, as long as the “two out of five” rule is met.
Are home repairs and improvements tax deductible?
No, not for personal residences. Repairs and improvements for income-producing properties (such as rental property) can be deductible. The cost of any improvements on your personal residence would be added to the original cost of your house. In most situations, since any gains upon the sale of your home would probably be tax free anyway, it wouldn’t make any difference. But in some situations (such as converting the house to rental) it could make a difference. So the receipts related to the cost of those improvements should be kept as long as you own the home.
What are the tax benefits to using the equity in my home?
Home Equity Loans and Lines of Credit are loans that use your existing home as collateral. The interest paid on this loan is deductible (up to $100,000 of debt) therefore lowering the effective cost of interest. However, in today’s interest rate environment, a Home Equity Loan might not be the best choice. A Cash-Out Refinance may be a better choice. With a Cash-Out Refinance you can take out a completely new mortgage that pays off the old one and provides additional cash for the home improvements. Make sure you discuss this option with a qualified mortgage lender.
Are there any limits?
Yes. You can only deduct the interest if the loan is $1,000,000 or less on the permanent mortgage (the “first”) and $100,000 or less on a home equity line (the “second”). Therefore, if you are doing a major renovation, you may have to consider the tax implication of the deductibility of the interest before deciding on whether to do a Cash-Out Refinance or an Equity Loan.
There are many issues that may arise if you’re thinking of selling your home, remodeling it, or even converting it to rental. Make sure you talk with a CPA who is knowledgeable in the area’s real estate before you make any final decisions.
Owning your own home offers some great opportunities to increase your wealth and reduce your taxes, a very desirable combination. |
