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By Susan Helton - 30 Dec 14

Tax Considerations for Home Sellers

Tax Considerations for Home SellersNow that the wrapping is done and the tree is looking a little bedraggled, it’s time to take a look at your end of the year financial picture. Congress recently passed a bill extending a collection of tax breaks. While many of these only apply to special interests such as research and development, some of them apply to homeowners and could help lower your tax bill.

Debt forgiveness

Following the housing crisis of 2007, Congress passed the Mortgage Forgiveness Debt Relief Act. Originally slated to be a temporary measure, Congress has extended the Act three times,  the most recent being the extension through the 2014 tax year. Under this rule, certain homeowners that lost their home through foreclosure, or qualified for one of the repayment adjustment plans, do not need to pay income taxes on the forgiven debt.

PMI deductions

Because of the volatile housing market in recent years, some lenders erred on the side of caution by requiring buyers to purchase private mortgage insurance (PMI). At the time, you could not write off the PMI even though your lender required it. But this year, homeowners that qualify and that itemize their deductions can now claim a tax deduction for the cost of paying PMI on both their primary home and on vacation homes.

Interest

Most people already know that they can get a tax break for the interest they pay on their mortgage. What they may not know is that the bigger the loan, the bigger the tax deduction. Just remember that it is not a huge deduction. For the average homeowner making between $40,000 and $75,000 the deduction amounts to just $50 per month or so. When your income is in the $250,000 range, however, the mortgage interest deduction is closer to $500 per month. Check with your tax advisor before taking out a mortgage just for the income tax break on the interest. Most states that have income tax also offer mortgage-holders a break on their taxes.

Property taxes

While property taxes take from your bottom line, the good news is that you can deduct your property taxes from your gross income. This reduces your taxable income and lowers you tax responsibility.  (There are adjustment for individuals subject to Alternative Minimum Taxes.)

Sales tax deductions

Several states have no income tax. For homeowners in these states—Alaska, Florida, Nevada, South Dakota, Texas and Washington—Congress passed a temporary tax break so that in 2014, taxpayers may deduct paid state and local general sales tax instead of income tax.

Improvements

Homeowners that added improvements such as Energy Star heating and air conditioning units, energy efficient windows, water heaters, insulation or roofs may be able to take advantage of tax credits. Check with your local energy provider for information on what qualifies.

2015 Breaks

  • U.S. Code 121 exempts certain home sellers from paying income taxes on the profit of the sale of their home.  If you have a gain from the sale of your main home you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.  To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
    • Owned the home for at least 2 years (the ownership test), and
    • Lived in the home as your main home for at least 2 years (the use test).
    • During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
    • Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions.
  • Selling Costs: These include legal fees, escrow fees, title insurance, inspections, real estate agent’s commission and advertising costs.
  • Moving deduction: If your home sale is due to relocation for work, you may be able to deduction transportation costs, travel to and lodging in your new city, and costs for storage.
  • Points: When you refinance hour home, if you paid points in order to get a lower interest rate you can deduct a proportional share until the loan is paid.

Deductions can be confusing and change from year to year, so be sure to consult with your income tax professional for specific deductions you can take.

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  • Susan Helton
  • 2 Ritz Carlton Drive Suite 201
  • Monarch Beach, CA 92629
  • 540 South Lake Avenue
  • Pasadena, CA 91101
  • CA DRE# 01854787
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