Federal Taxation of Home Ownership/Sale Flashcards
The Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act of 2017 (TCJA) is an important and relatively recent law that changed how taxes work for homeowners. The TCJA attempted to simplify tax filing for most taxpayers by almost doubling the standard deduction.
Mortgage Interest Deduction
$750,000 (for people filing jointly)
$375,000 (for people filing singly)
Anything beyond that is no longer tax-deductible.
To qualify for the mortgage interest deduction, a loan must be used to purchase what?
primary residence
Also, to qualify for this tax deduction, the loan money must be used to, “buy, build, or substantially improve” the property that secures the loan. If you’re using the money for anything other than that, the interest is not tax-deductible. This deduction also applies to all personal residences, including second homes (if they’re not classified as rental properties).
Home Equity Loan interest Deduction
So, if you paid a lot in real property ,state, and city taxes, you could subtract that amount from your total income when figuring out how much you owe in federal taxes. But after the _____, there’s now a limit of _____ on how much of these taxes you can deduct together on your federal tax return.
TCAJ
10,000
what is a property’s basis?
the price a buyer paid for the property
How is the amount realized from a sale calculated?
sale price - cost to make sell happen (aka closing cost, agent fees, advertising, etc.)
The Taxpayer Relief Act of 1997
Enter the Taxpayer Relief Act of 1997, which created certain exclusions (also called exemptions) from capital gains taxes for homeowners.
Under the capital gains tax exemption:
Homeowners filing singly may exclude up to the first $250,000 on the sale of a primary residence.
Homeowners filing jointly (married homeowners filing taxes together) may exclude up to the first $500,000.
In other words, if you made a capital gain of less than $250,000 (filing singly) or $500,000 (filing jointly) when you sold your primary residence, you pay zero dollars in capital gains tax.
How Partial Exemptions Work
If unforeseen circumstances force you to move before you’ve been in a home for two years, you are eligible for a prorated capital gains exemption.
The equation to determine the prorated amount is:
Months in home ÷ 24 x Exemption amount ($250,000 for a single person or $500,000 for a married couple)
1031 Exchange: Like for Like
A like-kind exchange is the tax-deferred sale or exchange of one investment property for another similar one. It’s used when an investor wants to sell an asset and acquire a similar one while avoiding the capital gains tax.
