Tax Benefits of Home Ownership

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Page Summary

Property Taxes:  Since property taxes are generally paid in November for the fiscal year that runs from July 1st through June 30th, the amount you deduct on your tax return needs to be adjusted for the amounts you are charged or reimbursed in escrow.  Please note that this is not the monthly deposit that may be placed in an impound account, but the actual taxes paid to your county tax collector.

Upon purchase:

If you closed in the first half of the calendar year, you paid or reimbursed the seller for taxes paid through June 30th, which would increase your property tax deduction above what you also paid in November for the 2016-17 fiscal year.  

If you closed in the second half of the year, the seller reimbursed you for the period between July 1st and your closing date, which would reduce your property tax deduction.

Upon sale, the reverse is true.

Interest and Loan Origination Fees:

Upon purchase, you probably have fully deductible loan points and possibly deductible mortgage insurance.

Upon sale, check to see if you have non-amortized points remaining from a previous refinancing.

Capital Gain:

Upon purchase, a number of escrow items may be added to your cost basis, which you will want when you eventually sell.

Upon sale, a number of items either add to your cost basis or reduce the amount realized, which has the same effect. If you qualify, $500,000 of gain for married taxpayers filing jointly ($250,000 for single filers) is excluded from your income.  If you owned your home long enough, those exclusions alone may not be enough; you may have gain exceeding the exclusion amounts.  If you deferred gains from a sale before 1997 (the tax law changed in July, 1997), you will need to reduce your cost basis by the amount of the excluded gain.  Adjustments also need to be made for improvements, depreciation taken for the business use of your home, costs to fix up the home for sale, closing costs, and a host of other items.  This is an area where a qualified tax professional can be a lot of help.

These reminders are intended to alert you to frequently missed opportunities for income tax savings.  The list is not complete.  A qualified tax professional should easily be able to handle the specifics.  Additional information, for both buyers and sellers, can be found in:

IRS Publication 523, Selling Your Home, click here 
IRS Publication 936, Home Mortgage Interest Deduction, click here