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Real Estate & Finance News That Affects Your Home                                     December 2007 - Page 2

INTEREST

Homeownership Has Its Benefits

Interest payments on a residential mortgage - assuming the mortgage isn't larger than the purchase price of the home - are fully deductible in most circumstances. That's a key reason why homeownership is a superb tax shelter. Mortgage interest on a second home is also deductible (see "VACATION HOMES" story).

If you own a third home for personal purposes, the mortgage interest is treated as "consumer loan" interest and is not deductible. Interest on home equity loans (see "EQUITY LOANS" story) is deductible, with some limitations.

Keep in Mind: If you are planning to buy a home with a large amount of cash, consider carefully if you plan to ultimately finance the property.

For interest to be deductible on a financing more than 90 days after closing, it will be limited to the original acquisition loan balance plus $100,000, unless the new financing is used to improve your home.

Keep careful records of when and how much you spend on home improvements when you refinance your home or take out a home equity loan. Consult your tax advisor about the deduction of interest payments when you refinance with a higher loan amount to take money out of the refinancing or pay off other debts.

EQUITY LOANS

Put your Home's Equity To Work

Did you know? Interest is fully deductible for regular tax purposes on home equity loans up to $100,000 - in contrast to other types of loans - regardless of how the proceeds are used. A home equity loan, including a second mortgage, equity credit line or some refinancing, is a loan secured by a primary or second home. Interest on a home equity loan in excess of $100,000 is also fully deductible if the excess loan proceeds are used for home improvements.

Keeping careful records of all home improvements will help document your home equity loan interest deduction. The loan, when added to other debt secured by the residence, cannot exceed the fair market value of the property. (Some state laws restrict home equity loans. Give us a call or consult your tax advisor to learn more.)

Keep in Mind: Interest paid on credit cards or other types of personal loans, such as car loans, is not deductible. For many owners, it makes tax sense to pay off this kind of debt with a home equity credit line or loan. Alternative Minimum Tax rules may apply, however.

POINTS

Points Deductible For Buyers

For home buyers, deductible expenses include settlement charges for points. Deductible points are upfront charges for the use of money (not services). One point equals 1% of the loan amount. Points paid by either the buyer or seller are deductible by the buyer in the year of the purchase. Sometimes closing service fees are quoted as "points," but are not deductible as interest.

Keep in Mind: If you are buying a home and need financial assistance from the sellers, consider having them pay for as many interest points as possible, thereby increasing your tax deduction.

CAPITAL GAINS

Tax Breaks Can Put Money In Your Pocket

Tax payers who sell their principal residence can pocket - tax free - as much as $500,000 in profit if they file federal taxes jointly, or $250,000 if they file singly. The property must have been by at least one person, for joint filers, and used as their principal residence by both, for joint filers, for any two of the prior five years.

Homeowners can shelter the profits on the sale of a home as often as once every two years. If the two-year use and ownership tests are not met, but the home is sold because of special circumstances (i.e., health problem, job loss, etc.), the exclusion is prorated. Otherwise, gains above $500,000 or $250,000 are taxed at current capital gains rates, which vary depending on your tax bracket.

Keep In Mind: Homeowners should continue to maintain records of selling and improvement expenses because some states still tax capital gains on home sales. In addition, those expenses can be used to determine your tax basis once you sell the home.

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