Individual retirement accounts are great. Charitable donations
are indeed admirable.
Individual retirement accounts are great. Charitable donations are indeed admirable.
And the standard deduction is ok as far as it goes. But when it comes to saving money on your taxes, there’s really no place like home.
As the dreaded April 15 tax deadline approaches, most Californians are counting their blessings that they have the deductions that come with owning a home.
But surprisingly enough, millions of people who could qualify for a mortgage are still choosing to rent, missing out on the very best tax deductions Uncle Sam has to offer.
By making the move from renting to owning, homebuyers are in effect putting money back into their own pocket instead of their landlord’s.
Not only are they avoiding taxes that they would otherwise have to pay the state and federal government, they are building equity in their homes.
For many people, the rising value of Tahoe/Truckee real estate translates into their most profitable retirement account somewhere down the road.
Although the monthly mortgage payment may appear daunting for first-time buyers, the after-tax cost in “real dollars” may not be much more than they’re paying today for rent.
What’s more, after a few years their mortgage payments will probably be less than their rent given the rising cost of living.
As a real estate expert, I don’t profess to be a tax expert. I always recommend my clients seek advice from their CPA or other tax professional. But as a rule, I can tell you that there are several short-term and long-term financial benefits from home ownership.
Most homeowners can deduct property taxes and interest paid on their mortgage every year of ownership. Plus the cost of ‘points’ (loan origination fees) paid in the year of purchase can be deducted as well.
Bear in mind that in the early years, most of a mortgage payment is interest. Even in the 10th year, the payment is still 75% interest. All of that is tax deductible.
Homeowners can borrow against the equity they build. Equity from a home can be used to improve the property, buy a car or pay for an education, and homeowners may have the ability to deduct the interest from their federal taxes. Renters never have this opportunity.
Real estate – particularly in Northern California – has appreciated at a much faster rate than the cost of living.
This appreciation in the value of a home, plus the reduction of principal on the loan used to purchase the home, provides an unbeatable increase in a homeowner’s net worth.
Single taxpayers who qualify owe no tax on the first $250,000 of gain from the sale of a principal residence. The amount is $500,000 for married couples filing jointly, and this exemption can be used more than once.
A large percentage of Californians are single homeowners and the $250,000 exemption listed above can be used by multiple homeowners that own and live in the same property.
Three singles living and owning the same property can get a total of $750,000 in exemptions.
Interest paid on a second mortgage may also be deductible if the total of the first and second mortgages is no greater than $1 million. However, that benefit is scaled back based on your tax bracket.
Certain moving expenses may be deductible if the move is job-related and the relocation is 50 or more miles from the previous residence.
In California, sellers over the age of 55 have some special benefits, such as transferring the tax base from their current home to another of the same or lesser value within the same county or another county if it has passed a resolution accepting such transfers.
This is of real benefit to those sellers who have lived in their homes for many years and have low real estate taxes due to Proposition 13. See your real estate advisor to analyze your particular situation.
Real estate in California has been a better long-term investment than the stock market. The power of leveraging is the key to excellent returns on your real estate investment. So as this year’s tax deadline approaches, now’s the time to begin thinking of ways to lesson next year’s tax bill. Repeat after me, “There’s no place like home.”
Chris Ordaz, manager of Coldwell Banker’s Gilroy and Morgan Hill office, is a real estate veteran. He can be reached at 848-2800.
