Welcome to the Great American Dream
Since the conclusion of World War II, home ownership in the United States has been the "American Dream." Besides satisfying your dream and putting a roof over your head, your home provides you with important financial benefits:
- It forces you to become a saver, since a portion of every mortgage payment you make builds equity in your home.
- It helps you build up your net worth.
- It has important tax benefits: Real estate taxes and mortgage interest payments are generally deductible.
- It may appreciate in value and may continue to be a good inflation hedge.
- If you need to borrow, it is a source of funds through a second mortgage or home-equity line of credit.
The Great American Tax Shelter
Owning your home is often referred to as the great American dream. It is actually the best tax shelter going these days.
- Your primary residence mortgage interest is deductible up to a limit of $750,000 for loans taken out after December 15, 2017. Loans made before that date can continue to deduct interest on mortgage debt up $1 million, if married filing jointly ($500,000 if married filing separately). Homeowners can refinance mortgage debts that existed before December 15, 2017 up to $1 million and still deduct the interest as long as the new loan does not exceed the amount refinanced. The interest on a home-equity loan can be deducted as long as the proceeds are used to substantially improve the home.
- Mortgage interest paid on a second residence is deductible as long as you don't rent out the residence during the tax year, and the mortgage satisfies the same requirements for deductible interest as on a primary residence. If you do rent out the residence, you must use it for more than 14 days or more than 10% of the number of days you rent it out, whichever is longer, for the mortgage interest to be deductible. If the home was acquired on or before December 15, 2017, then the total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main and second home is $1,000,000; or $500,000 if married filing separately. If the home was acquired after December 15, 2017, the home acquisition debt limit is $750,000; or $375,000 if married filing separately
- For your primary and second home, state and local real property taxes are generally deductible. Deductible real property taxes include any state or local taxes based on the value of the real property and levied for the general public welfare. The total deduction allowed for all state and local taxes per home, including real property taxes, is limited to $10,000; or $5,000 if married filing separately.
- Buying a home will almost certainly mean you'll begin to itemize your deductions if you haven't done so before. This means that other expenses which had no tax value to you in the past, such as charitable contributions, state income taxes, and un-reimbursed medical expenses may become tax-saving itemized deductions.
- Points paid in the year the home is purchased (subject to certain restrictions) are fully deductible in that year.
- Improvements made to the property add "basis" to that property which reduces the amount of gain potentially subject to tax when the home is sold.
- When you sell your home, if you meet certain requirements, you may be able to exclude up to $250,000 of gain ($500,000 for a married couple filing a joint return).
The key to success in dealings with real estate often lies in the ability to effectively negotiate. A wise negotiator is prepared and knowledgeable in the subject at hand. This section is designed to educate you with respect to the real estate transaction you are considering. Whether you are buying a home, a vacation home, or investment property, the information in this section should give you the confidence you need to make the right decisions for your particular situation.
NOTE: There’s an exception to that Dec. 15, 2017, cutoff: If you entered into a written binding contract before that date to close before Jan. 1, 2018, and you closed on the house before April 1, 2018, the IRS considers your mortgage to be obtained prior to Dec. 16, 2017.
Buying a Home
Buying a home, especially your first, can be overwhelming. It is a big investment—often the largest single purchase most people ever make—and you certainly don't want to make a mistake. Although it may seem like a giant step, it is certainly not an impossible one, even if you haven't stockpiled a big down payment.
Take some time to explore this section. When you've done so, you will:
- be able to decide whether buying a home makes more sense for you than renting;
- understand the pros and cons of buying a new home or an older one;
- have a good idea of how to choose a real estate broker;
- be able to determine how much home you can afford;
- understand how to negotiate a purchase price;
- be able to decide what type of mortgage is best for you; and
- be prepared when you go to the closing.
Buying a Vacation Home and Investment Property
The middle class routinely struggles for ways to reduce taxes. Because there aren't many creative ways left to keep Uncle Sam at bay, investing in real estate may be viewed as the last middle-class tax shelter. Maybe you're considering a dream cottage on the coast... or an apartment house to supplement your income. You don't have to be rich to buy a second property. Real estate is still usually considered a sound investment provided you do your homework and develop a strategy that will help you to achieve your objectives.
When you're done working with this section you will also:
- determine what resources are available to you and which ones to use to finance your purchase;
- decide if purchasing a vacation home or investment property is right for you;
- become familiar with the different investment strategies that you can use for owning a second property; and
- understand important tax strategies and their implications.