by
Carl Hampton
08/04/2006
When it comes to tax shelters, there’s no
better or safer place than our own homes.
There are a vast number of companies out
there spending a lot of money on advertising
trying to convince us that we should be
sending our hard earned dollars to some
island in the sun, where (for a nice fat fee
of course) they will keep our money safe and
out of the hands of the IRS. Most of these
programs, for lack of a better word, are
illegal or at the very best not as tax
efficient as the claims they make. Uncle Sam
allows us to use our homes as a means of
collecting a large number of tax deductions,
credits and benefits. These were designed
and assigned to law to help us offset the
cost of owning our own homes. After all,
homeowners are the cornerstone of any good
economy. We buy consumable goods and
services which creates jobs and supplies
much needed dollars in both local and state
taxes. These taxable deductions also keep
the housing market fueled with new buyers
which in turn helps keep the value of our
homes going up. It really is only a matter
of very simple math. As the demand for more
and more homes increase, the supply gets
smaller, (they don't make land anymore) -
then the market price can only go one way,
up. This creates real wealth for future
generations of our families. For most of us,
that is the “Great American Dream” -
owning our own homes and creating real
wealth for our retirement.
Our interest payments make up the largest
portion of the mortgage payments in the
early years of the loan. The interest we pay
on our Home Loan, up to a maximum of $1
million in mortgage debt that's secured by a
first and second home is tax deductible.
These deductions will reduce our taxable
income when calculated against our taxes due
at the end of the year. The rules on these
deductions are not too complicated once you
know where to look. The $1 million level
applies to joint tax filers. If you file
single or separately you receive half the
deductions allowed.
The interest we pay on a home improvement
loan is also deductible against our end of
year taxes, but calculated a little
differently. We can deduct all the interest
on a home improvement loan so long as the
work is classed as “capital
improvement”. Repairs, maintenance or
cosmetic upgrades do not count and are not
tax deductible. Capital improvements
increase the home’s value. Adding a new
room, a bathroom, anything that prolongs its
life such as a new roof or adapting the home
for new uses to assist older people or
people with disabilities would be included
for this purpose.
The Taxpayers Relief Act of 1997 which
covers the exclusions on Capital Gains
allows married couples who file jointly to
keep up to $500,000 tax free profits on the
sale of a home used as a principal residence
for at least two of the prior five years.
This amount is halved for those who are
filing single or separately. Our taxable
capital gains are reduced by the amount of
our selling costs. These include real estate
commissions, title insurance, legal fees,
advertising, and inspection fees. Capital
Gains are calculated on the following basis:
the original purchase price, plus the cost
of capital improvements, minus any
depreciation and the selling cost.
With more and more people creating “Home
Based Businesses” there are tax deductions
available. If you use a portion of your home
exclusively for business you could qualify
to deduct a percentage of costs related to
that portion. You can Include a percentage
of your insurance, repair costs, utility
bills and depreciation.
It would appear that the “Grass is not
always greener somewhere else” and
sometimes the solution to our problem is
right there, on our own doorstep.
