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Congratulations on the purchase of your new home. Surely you are aware that owning a home increases the possibility of savings on your tax return. It may also enable you to lower your current federal and state income tax withholdings. As Certified Public Accountants, Kahn, CPA can assist you in taking full advantage of these tax-saving opportunities.

Read tax tips below for new home owners.


Marvin asks: 

"How long after you sell your home do you have to reinvest the money into a new home?" 

These rules changed a while back, but it's good to remind folks of the change and it's good news for you. Under the new law, a taxpayer of any age can exclude from income up to $250,000 of gain ($500,000 for joint filers meeting certain conditions) from the sale of a home. Remember, that's gain, not total selling price. The home must have been owned and used by the taxpayer as a principal residence for at least two of the five years before the sale. Married taxpayers filing jointly for the year of sale may exclude up to $500,000 of home-sale gain if: 

1) Either spouse owned the home for at least two of the five years before the sale, 

2) Both spouses used the home as a principal residence for at least two of the five years before the sale, and 

3) Neither spouse is ineligible for the full exclusion because of the once-every-two-year limit. 

So the answer is, no, you no longer have to reinvest the money from the sale of a home into another home and you don't even have to report  it (unless you made more than $250,000). 

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Elaine writes: 

"My husband and I recently bought a large boat with sleeping accommodations, a kitchen, and a restroom. A friend has told us that we may deduct our interest paid on the boat loan as we do our regular mortgage. Is she correct?" 

You may deduct interest that is paid during the tax year for the purchase of a qualified residence. A qualified residence includes the principle residence and one additional residence. The IRS says that "a residence generally includes a house, condominium, mobile home, boat, or house trailer that contains sleeping space and toilet and cooking facilities." Therefore, you would be able to deduct any mortgage interest on your home plus the interest paid on your boat loan. However, the total interest deduction may not exceed $1 million. In addition, you may deduct up to $100,000 of interest paid on a home equity loan. 

Please note that the interest deduction described above is for regular tax purposes and will not be allowed for minimum tax purposes.  Therefore, if you are in an Alternative Minimum Tax situation, you won't be allowed the interest deduction. 

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We recently received the following question from a client: 

"I own my own home. In 2006, I upgraded my house with aluminum siding. Not knowing that these are the types of costs that can be included on your tax return, I excluded it. Can I still claim those home improvement costs on my 2007 tax return? What is the statute of limitation on home improvement costs?" 

The IRS does not allow any deductions for home improvement costs for a taxpayer's home, unless it is being used to generate income, such as a rental property. Therefore, if you live in your home and do not rent any portion out, enjoy you recent home improvements, but don't try to deduct them on your next tax return. 

When you purchase a home, the price you pay is called your cost basis. When you make improvements or additions to your home, the costs, which can be significant, are added to your cost basis. What does this mean? If you ever sell your home, you must calculate the gain or loss of the sale for tax purposes. This is calculated by subtracting the adjusted cost basis from the sales price. This is why you should keep records of the improvements. 

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Lee asks: 

"We are closing on the sale of our old home next week and will probably make $30,000 on the sale. Will we be required to pay tax on this money? I have heard that if you sell your home and roll the capital gain into a new home within two years, you will not have to pay taxes. Our situation is different--we built a new home before selling our old one. Does this count?"

There's a new rule on the books and it's a good one. The rule states that you may exclude up to $250,000 (single) or $500,000 (married) of gain realized on the sale of your principal residence. That is gain, not sale price. For most of us, this means that you will not have to pay taxes on the sale of your home no matter what you do with the money afterward. The exclusion can be used as often as you like, but you can't use it more than once every two years. 

So what is considered a principal residence? It's a home during a five-year period in which: 

1) You owned the home for at least two years. 

2) You lived in the home as your main residence for at least two years. 

These two years do not have to be consecutive. Thus, you could live  in a home for years two and four over a five-year period.

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You don't have to pay taxes on the gains realized by the sale of your house--or principal residence--as long as you've lived there for at least two years. What happens if you purchase your home and then a year later, your company relocates you? 

The IRS has provided a reduced exclusion as long as you meet a few criteria: 

1) You owned a home on August 5, 1997, sold it before August 5, 1999,  and did not live in the house for the required two years; or 

2) Due to a change in health or place of employment, you either: 

a) did not meet the ownership and use tests, or 

b) excluded gain on the sale of another home within the last two years (in other words, you already took the exclusion in the last two years)

What this means is that you will be able to exclude a portion of your gain. The portion is figured by taking the amount of months you lived in the home, dividing it by 24, and multiplying the result by $250,000 ($500,000 if married). So let's say that you and your wife bought a home in November 2008 and have to sell it in November 2009. To meet the requirements, let's say that you have not sold a house in the last 3 years. You get a gain of say $25,000. Your exclusion will be limited to 12/24 * 500,000 or $250,000. Thus you can exclude all of the $25,000.

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Dennis asks: 

"My father-in-law recently sold his house so that he can live with my  family. He is elderly and needs to be looked after. We found a house that we all love and have moved into it. The problem is that my father-in-law paid the down payment on the house and his is the only name on the mortgage. I am making the monthly payments. Is there any way I can claim the deduction on my return?" 

The rule goes as follows; you can deduct mortgage interest only if you meet all of the following conditions: 

1) You must file Form 1040 and itemize deductions on Schedule A 

2) You must be legally liable for the loan 

So the answer is no, you cannot deduct payments you make for someone else if you are not legally liable to make them. In short, you can't take the deduction. 

Here are some other tax-saving options: If your father-in-law has any income, he can certainly use the interest deductions. If he doesn't have enough money for the mortgage, you and your wife can each give him $10,000 a year (tax free), which he can use to make the payments. 
At least someone gets the deductions. You can also work to move the property into your name, but that might prove to be a bit too much simply for the interest deductions. 

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David asks: 

"I recently sold my house for a loss. I lived in this house for eight years. Can I claim this loss when I do my taxes next January? And if I can, how do I do it." 

Everyone has heard of the significant changes regarding the sale of a primary residence for a gain. Unfortunately, I don't have good news in terms of taking a loss on the sale of a home. 

The subject of selling a residence for a loss has been discussed thoroughly throughout the years; however, Congress has not seen fit to allow this type of loss on individual tax returns. The sale of a home follows a classic "We win, you lose" tax format. If your sale price clears the current exclusion levels for selling a house, you will be taxed on your gains, but if you lose money on your investment, you don't get any deductions. 

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Alexandria, VA 22314