HOME: THE MOTHER OF ALL TAX SHELTERS
You can deduct mortgage interest and property taxes. And almost always, you can keep the gains when you sell your home. Well, thanks to rules made permanent in 2002 and some provisional rules, the Internal Revenue Service has gone and made your home potentially an even greater tax shelter than it has ever been especially if you use your home for your business.
Let’s look at all the deductions and benefits you get when you pay homage to the mortgage gods and go into more debt than your parents earned in their lifetimes.
Taxes
First, you get to deduct all the real property taxes you pay. That includes all state or local taxes for the general welfare. It doesn’t count any trash or garbage collection fees or homeowner association charges specifically stated and billed. If you’re escrowing for the taxes, you get the deduction when your bank makes the payment. Banks and insurers check your credit. So should you. Even if you’re a tenant shareholder in a coop, you get to deduct your share of any property taxes paid. There’s no limit on the number of properties on which you can deduct taxes paid. If you have 10 homes, you can deduct the taxes on all 10. (But watch out: If your deductions are too great, you could be required to use the Alternative Minimum Tax. The AMT is designed to ensure that everyone pays some tax and does so by forcing you to take fewer deductions.)
Interest
The government subsidizes your home purchase by making your interest payments deductible. Interest paid on the purchase of your principal residence is deductible. You can even finance additional land, adjacent to your home, and deduct the interest as qualified residence interest. You can also deduct the interest you pay to buy a second residence or vacation home. The personal interest deduction is limited to the first $1 million of debt. If you plan to spend more than $1 million for your house, call your accountants. You can also deduct the interest on as much as $100,000 worth of home equity debt. As long as the house has the equity and the debt is secured by that equity, the IRS doesn’t care what you do with the borrowed money. You can use it for whatever you want, including a vacation or a party to celebrate your newfound deductions.
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