Death and taxes are inevitable
Homeownership comes with a long list of pros and cons. When the plumbing springs a leak or the roof blows off or your spouse wants to paint the living room red, you're the person in charge of making sure it gets done. But along with the expenses and work associated with homeownership also comes some tax benefits which you should start taking notice of with April 15 just around the corner.
The gold standard and some people feel the gold plated tax deduction for home ownership is the mortgage interest deduction. For the majority of people who carry a mortgage on their home, most of the monthly payment represents interest on the loan. Although the longer the loan is in place, the less interest you pay annually, interest is always part of your monthly payment.
All of the interest paid on your mortgage loan is tax deductible, unless you are fortunate enough to own a multimillion-dollar mortgage on a multimillion-dollar mansion. Mortgages in excess of $1 million have limits placed on them relative to the amount that can be deducted.
Mortgage interest on second homes is also fully deductible, and a second home can be a boat or RV, as long as it has sleeping, cooking and bathroom facilities. Points, which are essentially prepaid interest, can also be deducted, but usually spread out over the life of the loan.
The other big advantage of owning a home is the property tax deduction, which is fully deductible, and tax benefits on profits when you sell your home. The current law states that a sales gain up to $250,000, or $500,000 for married couples filing jointly, is tax-free as long as the homeowner owned the property for two years and lived in it for two of the five years before the sale.
So that's the good news, however, the potential bad news is that in the future mortgage interest may not be deductible from your income tax to the same degree it now is. In its continuing effort to reduce the national debt and cover the escalating costs of Social Security and Medicare, Washington may be looking at reducing the mortgage interest deduction which will cost the federal treasury about $131 billion this year.
Some of the changes which have been discussed in the past are raising the eligible deduction from a $1 million mortgage to a $500,000 mortgage, eliminating the deduction for second homes and reducing the amount of the deduction based on income with eligibility for higher income earners being less.
The impact of reducing mortgage interest deductions on the real estate market could be significant, especially in regions like ours where second home ownership is a large part of the market. I also would keep my eye on the current exemption on the profit made on the sale of your home being rolled back as another way to generate tax income. This exemption has been in place since 1997.
Some of the typical homeowner expenses which are not deductible are homeowners insurance, association dues, improvements to your property (although improvements could establish a higher basis for your house and reduce your taxable profit when it's time to sell) and home depreciation.
Benjamin Franklin penned the famous quote "but in the world nothing can be said to be certain except death and taxes" way back in the 1700s. Since things haven't changed much since then it's important to be informed about the taxes part of Franklin's quote since you can't do much about the other.