What You Should Know When It Comes to Your Taxes & Real Estate
Before you get ready to buy or sell a property, or before you get ready to file your taxes, these are some basics you should know about how real estate can affect what you owe on your taxes.
Your home is considered a capital asset which means it can be subject to a capital gains tax. Capital gains taxes comes into play when your home has appreciate significantly in value. You are exempt from paying a capital gains tax on the first $250,000 of profit if you are single and on the first $500,000 of profit for married couples.
However, keep in mind that this exemption is only allowed every two years and it must be applied to a home that is considered a primary residence by the IRS, meaning that you must have occupied the home for at least two of the last five years.
You can also offset the likelihood of having to pay capital gains by making adjustments to the cost basis - meaning any fees and expenses you have incurred associated with the purchase of the home, home improvements, additions, etc.
Mortgage Interest Deduction
Did you know that you can itemize your mortgage interest to reduce your taxable income? So, if you have a mortgage, be sure to include that when filing your taxes to help reduce your tax bill and increase the amount you could potentially be refunded.
If you purchased your home prior to December 2017, you can deduct the mortgage interest paid on the first $1 million of your mortgage debt. If you purchased your home after December 15, 2017, you can deduct the interest paid during the tax year on the first $750,000 of the mortgage.
Property Tax Deduction
In addition to claiming your mortgage interest, you can also take advantage of the property tax deduction which allows you to deduct up to $10,000 ($5,000 if married and filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
If you sold your home, you can usually deduct the taxes attributable to the time you owned the property to the time you owned the property during the tax year. For example, if you sell your home in July, you would deduct the taxes for the first half of the year and the seller would deduct the taxes for the second half of the year.
Rental Income Deductions
If you own a rental property, remember that the income you receive must be reported on your tax return. But to reduce the amount of taxable income, you should account for any associated expenses like mortgage interest, property taxes, operating expenses, depreciation, and repairs. Basically, you can deduct anything related to managing, conserving, and maintaining your rental property.