• What are the annual tax benefits of homeownership?
• What are the tax consequences when you sell your home?
  
  
• Return to Buyer's Information-Useful Things To Know

What are the annual tax benefits of homeownership?

There are several tax advantages to homeownership that will likely reduce both your Federal and California State income tax liability. You should consult a tax advisor or CPA to determine the details of these tax advantages for your particular situation. However, the following are items you can deduct from your taxable income by listing these as itemized deductions on both your federal and state income tax returns.

• Annual Mortgage Loan Interest Charges. It includes first and second mortgages, home equity loans, and refinanced loans on your home.

• Property Tax. This is the annual property tax on your home paid to the County of Sonoma each year . Note that this is only for the items on your property tax bill based on the assessed value of the property, assessed uniformly on property throughout the community, and used for general community or governmental purposes.

• Points Reported to You on Form 1098. The points a lender charged you for a mortgage that are reported on Form 1098 (a form the IRS requires lenders to send you detailing interest and points paid in a taxable year) are deductible in the year reported.

• Points Not Reported on Form 1098. All the points you paid for a mortgage are shown on your settlement statement. Those points you paid only to borrow money are generally deductible over the life of the loan. Only the points reported on Form 1098 are deductible in the year incurred.

Title or escrow company personnel will review and explain your closing statement when you prepare to close your transaction and take ownership of your new home. This will assist you in understanding the separate categories of any points shown on the statement.

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What are the tax consequences when you sell your home?

In 1997 there was a major change in the federal tax laws that provides home owners a significant benefit when they sell their home. See IRS Publication 17, Chapter for the complete details of the changes. In summary the changes are as follows:

• For the sale or exchange of a principal residence after May 6, 1997, you can generally exclude from gross income up to $250,000 of gain (or $500,000 for married couples filing a joint return). This is not a one-time exclusion as the old law was for people over 55 years of age. You can reuse this new exclusion repeatedly as long as you meet the ownership and occupancy requirements in the next item.

• To exclude the gain, you generally must have owned the property as your main home for at least 2 years during the last 5-year period ending the date of sale.

• If you owned and lived in property as your main home for less than 2 years, you may be able to claim a reduced exclusion.

• You cannot deduct a loss on the sale of a home. This is considered by the IRS as a personal loss.

You should seek professional advice from your tax advisor or CPA before selling your home to ensure your transaction meets the IRS code. The tax code does change from time to time and a tax advisor or CPA can keep you informed of any changes.

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