Tax season is here. What better time to think about the tax implications of a real estate investment?
Here is a selection of updates and tips, based on 2021 news and policy trends. We’ve designed this article to be informative for homeowners and aspiring homeowners alike.
If You’ve Been Paying Off a Mortgage
We’ll start with a basic perk for homeowners. The good old mortgage interest deduction is a nice break if you’re a homeowner who opts to itemize. Your mortgage company should have provided Form 1098 to you at this point; the forms must be sent out by Feb. 1 annually, so homeowners can get busy filling in their tax returns.
Form 1098 lays out the interest you paid on your mortgage last year. Interest is deductible for:
- A basic mortgage. The IRS offers a tutorial on deducting mortgage-related expenses here.
- A second mortgage — that is, your home equity loan — if you borrowed the money for big upgrades like a kitchen makeover or structural improvements. It’s a great idea to have your upgrades appraised, to be sure you have a demonstrable claim that you have boosted your property value.
If you itemize, you can also deduct up to $10,000 on Schedule A of your tax return (or $5,000, if married and filing separate returns) for your combined state and local taxes — property taxes included. This amount could change, but expect this limit for your 2020 and 2021 tax years. If you bought a house last year, you began paying property taxes at closing.
Important note: Does your mortgage servicer pay your local taxes through an escrow account that you regularly pay into? Property taxes are deductible for the year and month the payment actually leaves your escrow account to pay the government — not when you deposit the funds. The IRS doesn’t permit deductions on property taxes until they are actually paid.
If You’ve Been Working in Your Home Office
During the 2020 tax year, the pandemic uprooted many people from commercial offices. Now, the IRS notes, there are more people working from home than ever. Some of these people established home-based businesses.
If you’re one of these people, your home office expenses may be tax-deductible. This is the case if you’re self-employed or working through contracts with companies. Deductions currently cannot be taken if you’re a remote employee for a company you do not own.
To qualify for the deduction, you need to have used a room or a distinct part of your home “regularly and exclusively” as your principal place of business. Calculate your deductions on IRS Form 8829 based on your actual receipts, or with the simplified deduction: $5 per square foot of your home office, up to $1,500.
If you used a room or sectioned off part of a room for work, measure the space that’s dedicated to your work, for deducting indirect home office expenses, like utilities. These expenses also include homeowner’s insurance and condo fees correlating with the percentage of your home’s space used. Direct home office expenses, like laptops and office chairs, are fully deductible. The home office deduction is not applicable to any part of the home used exclusively as a hotel-type business. The IRS discusses rentals of real estate, as well as depreciation of space in your home for business, in its discussion of depreciation.
If You Sold Your Home in 2020
If you sold your home in 2020, you either lost or gained money on the deal. Most people profit on home sales, but if you lost money, the loss is considered a personal expense. The loss is not tax-deductible unless you used the home for business or as a rental property.
Also, the transfer taxes levied on deed conveyances from one owner to the next are not tax-deductible.
Now for the good news. If you sold a home that served as your primary residence and you made money from the sale, you may qualify for a tax break. If you lived in the home for at least two of the last five years when you sold it, you may exclude up to $250,000 in capital gains (sale profits over and above the basis you originally paid for the house) from tax. A couple filing taxes jointly may exclude up to $500,000 for gains in the home sale.
And if you experienced a life-changing event in 2020 that resulted in your move, you might be eligible to have the two-year primary residence requirement waived.
☛ Pro tip: If that exclusion is not enough to cover your gains, or you don’t qualify for the exclusion, ask your accountant about ensuring the tax basis you are using is as high as it can be. Certain closing costs can be appropriately added to the home’s original cost to you. If you invested in structural upgrades, they might be permissible to include in your cost basis — thus reducing your capital gains. This is one reason why you’ll want to keep the receipts with your homeowner’s paperwork for when you sell.
For high-income investors, legislation raising the rate on long-term capital gains from 23.8% up to 39.6% could pass under the current administration; this may be notable if you’re deciding whether to sell now or later.
If You’re Hoping to Buy in 2021
First, a few words for hopeful first-time buyers. If you’re bogged down in student loans, and your debt-to-income ratio has previously barred you from obtaining a home loan, there might be light at the end of the tunnel. Two proposals are especially notable:
- President Biden is considering $50,000 in student loan forgiveness, in a plan that would make 80% of federal student loan borrowers debt-free.
- A Biden first-time buyer tax credit may be on the way. The new benefit could be “up to $15,000” in funds available and applicable right at the time you close on your new home.
If you’re ready to apply now, online mortgage approvals are fast becoming the method of choice. Today, the majority of mortgage applications are being submitted online.
And, thanks to a new generation of digital native home buyers, consumer empowerment is the leading trend in the mortgage world. United Wholesale Mortgage recently made a splash on Wall Street with its initial public offering — a move that prepares UWM to go toe-to-toe with Rocket Mortgage. With UWM’s new FindAMortgageBroker.com, a hopeful buyer can shop for a local, independent broker using a mapping tool. And using its value estimator, the shopper can find out what the home is worth and what the buyer will pay in property taxes.
☛ You can read more on the role of your mortgage broker here, as well as the role of the lender, the servicer, and other key parties.
Once your loan application is under way, have a plan to store the documentation you create and receive. Our New Homeowner’s Document Checklist & Storage Plan can help you prepare to organize your paperwork and be sure its helpfully copied, organized, and securely stored. see IRS publication 530 for more information on records you should keep, and expenses homeowners are permitted to deduct from their taxes.
If You’re Planning to Sell in 2021
What’s new for sellers to know?
As you’ve likely heard, it’s a seller’s market out there. So, if you’ve been thinking of making a move, this could be the right year to act. If you’ve not refinanced recently, you could get a double benefit: a lower mortgage interest rate when you purchase your new home. Just be prepared for the prices you’ll see when you look at the homes for sale. Today’s low interest rates have only increased the competition among buyers.
To help bolster your sale profit, think like a work-from-home buyer! There’s a high chance your buyers are, or will be, remote workers in 2021 or in the years ahead. Homes with dedicated office spaces are especially desirable.
☛ Getting your home ready for the market? See our guide to increasing your home’s remote-work appeal.
Back to Business as Usual: An On-Time Tax Return Date This Year
We have a deadline of April 15th, 2021 for filing our 2020 taxes. The standard deduction is now $12,400 (double that for couples filing jointly). There are a number of changes to the tax code, courtesy of the CARES Act. Ask your tax professional for further information.
Please note that nothing in this article is intended as, or should be considered, investment, tax, or legal advice. Deeds.com does not receive income or benefits from the companies mentioned in our articles. We offer our articles as news and general information, and urge our readers to make investment and tax decisions with the advice of licensed professionals.