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Mortgage Education
Considerations Beyond the Mortgage
Tax Considerations
Presented by Phil Lohnes, CPA
Financial Framework
781-646-7823
phil@financialframework.com
1) How will my taxes change when I buy a home?
Your Federal taxes will probably be lower, but “more complicated”. The change will mean that you will file the 1040 long form (as opposed to 1040 EZ or 1040 A) and you will fill out Schedule A: Itemized deductions (which is where you will lower your taxes). Your state taxes in Massachusetts will remain the same.
2) Do I have to keep additional records for tax purposes?
Yes, but not necessarily with regard to the house. Each year your mortgage company will send you a Form 1098. This form will indicate your mortgage interest deduction, and if you pay your property taxes with your mortgage, it will include your real estate taxes, as well. If not, you will need to keep track of the payments you make each year (the deduction is based on payments not what you are billed).
More importantly, now that you itemize, you need to keep track of other things that weren’t deductible for you before. The most common here is charitable giving, both cash and property. Other deductions can be payments to financial advisers, accountants, or un- reimbursed employee expenses.
3) What if I buy a two or three family home?
The first obvious change is that you will need to file Schedule E, which is primarily for rental income property, along with Form 4562 Depreciation and Amortization. These two forms will allow you to report the income from your rental property and the various expenses.
4) When I sell my home, when do I have to buy my new house to avoid the gain?
It has been a long time since you had to buy a new house after selling your old house to avoid the gain. The current rules allow you to have a $250,000 gain (or $500,000 if married) tax free every two years. You must have owned and lived in your house at least two years to avoid the gain.
5) Do I get the tax free gain when I sell my income property?
No, though there is a technique for deferring the gain. The technique is know as a section 1231 exchange, which requires buying a new property very shortly after selling the current one (for all practical purposes you need to know what you are going to buy before actually selling your current income property).