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This is tax savings with real estate ownership explain, and I am Jessica Chisholm, a CPA at Huddleston Tax CPAs and we're located just outside of Seattle, Washington.
Let's go ahead and get started with the presentation here.
Things we want to go over today are tax savings with owning your personal residence, and tax savings with owning rental properties, what it means to be a real estate professional, and then I'll touch a little bit on house flipping--the tax impact of that.
When you own your own home, there are tax benefits available to you. Some deductible items for owning your personal residence are deductible in the Schedule A of your personal for 1040. Things that are deductible are the mortgage interest that you pay on your home loan, points that you pay when you purchase or refinance, qualified mortgage insurance, and real estate taxes. For the mortgage interest that you pay on the loan on your home, the interest is deductible on the first $1 million of home acquisition debt, and the first $100,000 of home improvement debt. So if you take out a loan when you purchase your house for less than $1 million then all the mortgage interest you pay for the year is deductible on that loan.
If you have a loan that you take out for greater than a million dollars, for instance, maybe you take out a loan for $1.5 million, so $1 million of that is 2/3rds of your loan. 2/3rds of your loan would be deductible, the interest would be deductible for the year. So it phases out after the $1 million. But you also can take out home improvement debt, maybe a second mortgage, or line of credit to improve your home. The interest is deductible on the first $100,000 of that.
As for the points, if you pay points when you purchase your home within those points its deductible all in the year of the purchase of the home. If you pay points when you refinance your home, then those points would be amortized and deductible over the life of the loan. So is you refinance into a new 30-year loan, and you pay points on that loan, then you would divide the points by the 30 years, then a certain percentage would be deductible each year for the 30 year life of the loan.
If you refinance or sell the house before you write off all those points, then the remaining points are completely written off in the year of the refinance of sale of the house.
For qualified mortgage insurance, if you pay qualified mortgage insurance on your loan then it is deductible on Schedule A. If you started paying that mortgage insurance after I believe January 1st of 2007. Also the real estate taxes that you pay on your home are deductible on the schedule A as well. So those are all things that are beneficial for owning your own home and allow you to itemize your deductions.
Other things that are deductible on Schedule A that you probably wouldn't be able to deduct otherwise if you didn't own your own home. Most people that don't own their own home are not able to itemize their deductions, but rather take the standard deductions. Other things that you can add to these deductions on Schedule A would be things like charitable contributions, medical expenses, personal property tax, and then miscellaneous itemized deductions like un-reimbursed employee business expenses and tax preparer's fees.