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  • Justin Smith CPA

Tax Code Favors Homeowners

The real estate market continues to be incredibly hot, with Lee County placing 2nd only behind Baldwin County for the fastest growing county in Alabama during 2019 (Auburn was the 6th fastest growing city). As more people move into the area, home prices strengthen and the opportunity to build wealth through real estate sales continues to be attractive. Home ownership is one of the greatest wealth building investments in America.


Mortgage Interest and Mortgage Insurance Premiums

The deduction for mortgage insurance premiums (also known as private mortgage insurance, or PMI) is back and is currently available through 2020 as an itemized deduction along with mortgage interest.


Mortgage interest generally remains deductible on the first $750,000 of debt for loans taken out after December 16, 2017, and second loans on your home are only deductible if they were used to build, buy or substantially improve your home (effectively removing the benefit for using home equity to buy other assets such as vehicles).


Gains on Sale of Primary Residence Can Be Tax Free

Congress has provided homeowners with one of the best tax benefits ever devised with the primary residence home gain exclusion. Federal law permits single taxpayers to exclude up to $250,000 in profit ($500,000 for married taxpayers) on the sale of their primary residence, and Alabama follows this law. Profit is broadly defined as the realized gain (sales price, less costs of sale such as commissions, less your basis in the home). You typically must have lived in the home for at least 2 of the previous 5 years.


The exclusion provides taxpayers with an outstanding opportunity to shelter substantial profits from tax. The best part is you can take advantage of this benefit multiple times – as long as you own and live in a home as your primary residence for the minimum required time. As with most tax benefits, there are exceptions and nuances (such as waiving the 2-year requirement for active servicemembers who relocate due to military orders).


Gameday Rentals Can Be Tax Free

Companies such as Airbnb and VRBO make it easier than ever to rent your home or even a bedroom on a short-term basis. Savvy homeowners can command attractive rental rates during football weekends, graduations or other events in which the demand for short-term lodging exceeds the supply.


The best part is that under the current tax law, homeowners can rent out their home for fewer than 15 days during the year, and take all the profits tax free. You cannot deduct the expenses related to the short-term rental, but you don’t have to report any of the income. That’s a great way to pocket free money.


Rental Income for Landlords Is Complicated

Taxpayers who own rental property can face complicated tax situations and should consider depreciation, cost segregation, and passive activity losses. Typically, home rental income and expenses are reportable on your taxes, and items such as depreciation on the home and improvements (land is never depreciated), property taxes, HOA dues, insurance and repairs must be considered. Mortgage interest is deductible, but the principal payments are not. When you sell the home, capital gains taxes must be considered along with depreciation recapture.


Landlords should engage a professional tax preparer as complications arise quickly. Overall, owning real estate can be an excellent wealth building tool.

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