Posts Tagged ‘tax benefits’

Buying Your Billerica House in a Hurry? Not So Fast!

 The goal of owning your Billerica home free and clear is usually thought of as the sunniest eventual outcome of the process that begins with buying your Billerica house. The vision of the day when you make that last mortgage payment is an attractive one: whether in retirement or sooner, a “free rent” future has great appeal.

So when financial planners argue against the wisdom of paying off your mortgage, it makes for interesting reading. One such planner is Ric Edelman, whose article “11 Great Reasons to Carry a Big, Long Mortgage” presents a laundry list of the possible financial benefits. As one of the nations’ foremost financial advisers, Edelman also has a well-earned reputation for brash presentations (his PBS series made the most of that). And he really does list eleven reasons why “you should have as big a mortgage as you can get and never pay it off.”

Some of the reasons are fact-based—but not really pertinent. For instance, Reason #1 is that your mortgage doesn’t affect your home’s value. True: whether its value rises or falls depends largely on the current Billerica market…but that isn’t a reason for or against carrying home loan debt.

The same is true for Reason #2, which is that a mortgage “won’t stop you from building equity…” The logic here is the same: even if you never paid down your home loan’s principal at all, if the expected market value rises (it’s “almost certain to grow in value over the next 20 years”), your equity would grow independently.

More convincing are the remaining nine reasons, leading off with Reason #3, “A mortgage is cheap money.” This will earn head nods from every financial analyst, and it’s doubly true with today’s incredibly low interest rates. It may only be useful to those who have ideas for places where the “cheap money” can produce juicy profits—but what financial planner can’t suggest a few?

The other reasons deal with:

  • tax benefits
  • the dwindling real cost of mortgage payments over time due to inflation
  • the liquidity provided by refinancing (“selling without selling”)
  • the wealth creation possibilities of money invested sooner rather than later

Each of these can be illustrated by graphs and charts (and believe me, they are).

Whether you are more of the less-owed-the-better mindset or Edelman’s big long mortgage school, one thing holds true in both cases: buying your Billerica house is the necessary first step. I can be of immediate value in that department—call me to see what I mean!

Joan Parcewski, Realtor & Notary

LAER Realty Partners           http://www.JoanParcewski.LAERRealty.com

JParcewski@LAERRealty.com    cell 978-376-3978

 Laer Realty PartnersJoan Parcewski Full Picture 102017

 

Tax Benefit for Couples Owning Separate Homes – A Reprint from Inman News 4/9/12

With everyone focused on filing their taxes, this article  from Inman New (www.Inman.com/newsletter) is perfectly timed with great information for everyone.   Remember that “Mortgage interest deduction available per residence, not per taxpayer”

 

Before the current, rather liberal, tax advantages for homeownership, many older people delayed or declined marriage or remarriage “for tax purposes.”

That’s because each individual over 55 was entitled to a one-time tax exclusion of $125,000 on the sale of a principal residence.

Because many former spouses entered into a new relationship already owning a home, they usually chose to sell one of them before returning to the altar. That way, they could obtain the $125,000 benefit twice; a married couple got it only once.

I thought about that “marriage penalty” recently when the U.S. Tax Court ruled that the cap on mortgage interest deductions applies in the same way to unmarried couples as it does to married couples, affirming a ruling by the Internal Revenue Service assessing a tax deficiency against a gay couple who jointly own two houses.

The court rejected the petitioners’ argument that Congress intended to impose a “marriage penalty” on married couples.

Under the Internal Revenue Code, mortgage interest is deductible from income, but not to the extent that it is attributable to an outstanding mortgage principal balance of more than $1 million. Similarly, interest payable on a home equity line of credit that is used to finance home improvements is deductible, but not to the extent that it is attributable to an outstanding loan balance of more than $100,000.

In this case, the same-sex couple jointly purchased houses in areas of Los Angeles and Palm Springs. They used the Palm Springs house for vacations and weekends and the L.A. home as their primary residence.

The outstanding mortgage principal balances for the two houses exceeded $2 million in 2006 and 2007, and the outstanding principal balance on a joint home equity loan exceeded $200,000.

In filing their federal income tax returns for 2006 and 2007, they each claimed interest deductions for interest attributable to a $1 million mortgage balance and $100,000 home equity loan balance, effectively asserting that each could use the full interest deduction allowance.

According to the case, the IRS sent both people deficiency notices, disallowing a substantial portion of their interest deductions. It maintained that the $1 million and $100,000 caps were applied per residence, not per taxpayer.

The IRS pointed out that a married couple jointly purchasing a house is subject to the $1 million and $100,000 cap, even when the married couple files their income tax returns separately (in which case, each can claim deductions only for interest attributable to half the capped amounts).

And, in a prior case, the IRS had taken the same position regarding unmarried different-sex couples who purchased houses jointly.

Which takes us back to the benefit of owning (not necessarily filing) separately especially when it comes to deducting mortgage interest on expensive homes.

The Taxpayer Relief Act of 1997 changed not only the one-time, $125,000 home-sale exclusion for persons over 55 years of age, but also the “rollover replacement rule.” Under the old law, a taxpayer could defer any gain on the sale of a principal residence by buying or building a home of equal or greater value within 24 months of the sale of the first home.

Tax on the gain was not eliminated, but merely “rolled over” into the new residence, reducing the tax basis of the new home.

The intent of the 1997 tax code, which replaced the “rollover” provision and $125,000 over-55 exclusion, was to allow most homeowners to sell their primary residence without tax — and not worry about keeping records. Taxpayers no longer can utilize parts of either portion.

In order to qualify for the $250,000 exclusion ($500,000 for married couples), taxpayers must have owned and used the property as a principal residence for two out of five years prior to the date of sale.

Second, they must not have used this same exclusion in the two-year period prior to the sale. So, the only limit on the number of times a taxpayer can claim this exclusion is once in any two-year period.

by Tom Kelly, Inman News


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