Thursday, October 8, 2009

Tax implications of buying a home

This isn't going to be a very in depth or scientific article about the tax process, but more so what I experience during my first two years of home ownership.  Since I bought my home in December 2007, I really only benefited from this during the 2008 tax year. 

One of the beauty of buying a home is the generous tax breaks you get for both your property taxes as well as any interest you may have paid on the mortgage.  Even though there are a lot of tax benefits from owning a home, but they may not come in the way you think they should.  First of all, you still have to diligently pay all of your mortgage payments as well as any outstanding property taxes you may owe on the home throughout the year (monthly for the mortgage payments, November and February for property taxes) -- and you get some of it back at the end of the year.

Given how new my loan is, most of that payment consist of interest payments.  Whatever interest I have paid throughout the year for my mortgage, as well as any property taxes, are added up and deducted from my gross salary.  After various other deductions and additions, my accountant comes up with my final taxable income.  If I make $100,000 per year, and I have paid out $46,000 in interest and property taxes, my net taxable income could be $54,000.  The end result is I'm in a much lower tax rate, and the taxes withheld throughout the year at the $100,000 rate will be refunded back to me.

If you wish to get more of that dispensable income throughout the year, you can also up your deductions on your W-9.  This way, you can get more of your income in each paycheck, but receive less cash back at the end of the year.

If this is a rental or investment property, there is a maximum allowable deduction you can take for the property of I believe around $25,000 per year.  Anything addition gets rolled up into a "bankable" balance that can be cashed in when you sell your property.

Below is a great article from Nolo about investment properties:

"Top Ten Tax Deductions for Landlords

Learn about the many tax deductions available to rental property owners.

Every year, millions of landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available for owners of rental property. Rental real estate provides more tax benefits than almost any other investment.

Often, these benefits make the difference between losing money and earning a profit on a rental property. Here are the top ten tax deductions for owners of small residential rental property.

1. Interest
Interest is often a landlord's single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity.

2. Depreciation
The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.

3. Repairs
The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

4. Local Travel
Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.

If you drive a car, SUV, van, pickup, or panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can:

* deduct your actual expenses (gasoline, upkeep, repairs), or
* use the standard mileage rate (55 cents per mile for 2009; 58.5 cents per mile for July 1, 2008 through December 31, 2008 and 50.5 cents per mile from January 1, 2008 through June 30, 2008). To qualify for the standard mileage rate, you must use the standard mileage method the first year you use a car for your business activity. Moreover, you can't use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle. 

5. Long Distance Travel
If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.

However, IRS auditors closely scrutinize deductions for overnight travel -- and many taxpayers get caught claiming these deductions without proper records to back them up. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long distance travel expenses.

6. Home Office
Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.

For the ins and outs on taking the home office deduction, see Home Business Tax Deductions or Every Landlord's Tax Deduction Guide, both by Stephen Fishman (Nolo).

7. Employees and Independent Contractors
Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

8. Casualty and Theft Losses
If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called casualty losses. You usually won't be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

9. Insurance
You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers' compensation insurance.

10. Legal and Professional Services
Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity."

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