by
Barbara Weitman, Esq.
Your home may be both your most substantial asset and
your best tax shelter, too.
You probably know that after using a home as your primary
residence for two out of five years, you can exclude from
income up to $250,000 of gain on its sale-$500,000 on a joint
return.
But there are many more ways to use your home to save
taxes. These homeowners' victories over the IRS show
how.
Mortgage Interest
You can take a mortgage interest deduction for the interest
you pay on a loan of up to $1 million used to acquire, build,
or substantially improve a home, plus subsequent home
equity loans totaling up to $100,000 at any one time. In
addition…
- Bigger home equity interest deductions - Interest on home equity loans exceeding
$100,000 may be deductible as business or investment
interest if the borrowed funds are used for a business or
investment purpose This may give a person who owns an
appreciated home a low-cost way of financing a business or
investment opportunity
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Sometimes points on refinancing are deductible - Points, or loan origination fees, incurred when refinancing a home mortgage generally are not deductible-but were deductible when a new home was acquired using a three-year balloon loan that had to be refinanced at the end of its term. The IRS disallowed the home owner 5 deduction for the points on the refinancing-but the Court of Appeals said the
short term nature of the original loan made the refinancing an "integrated step" in the acquisition of the home, so the points were deductible.
- Deducting points paid by the seller - Homebuyers can deduct points on a home acquisition loan even if the seller pays them. The rationale is that the seller's payment of the points is reflected in the purchase price, so the buyer is the "real" payer.
- Benefit of spreading out points - The deduction of points on a home mortgage can be deferred by deducting them over the life of the loan rather than in the first year.
This was the decision in a case where a young couple buying their first home didn't have sufficient deductions to itemize in the year they bought the home-so they would have received no tax benefit from the points. By deducting the points over the life of the loan they may obtain a tax benefit from them in future years.
Home Offices
A home office deduction can provide a tax write-off for a portion of home ownership expenses such as insurance, utilities, maintenance, repairs, and depreciation-the latter being a no cash-cost deduction you can claim even if your home is appreciating in value.
New break: More people can deduct home offices starting this year New law lets an office be deducted if it is needed for keeping records for a business primarily conducted elsewhere-an exception to the general requirement that a home office be the principal place where the taxpayer conducts a business
Deduction opportunities:
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Part of a room - An office that is only part of a room is deductible, so long as that part of the room is used exclusively for business.
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Sharing an office - When two spouses use a home office exclusively for work, but only one spouse qualifies to take a home office deduction because the other spouse has a regular office elsewhere, the home office is deductible.
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Freestanding home office - When an office is in a separate structure apart from your residence-such as a converted gardener's shed or freestanding garage-the requirement that the office be your "principal place of business" does not apply. So a top executive could deduct a freestanding office that he built next to his beach house in spite of the fact that he had a regular business office elsewhere.
Extra: A home office may also give you a deduction for commuting between home and other work locations. Normally, commuting between one's residence and work locations is not deductible-but travel between two work locations deductible.
Renting For Profit
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Ownership costs deduction - If you rent part of your home or another property out for income, you can deduct ownership costs such as insurance, maintenance, and depreciation against rental income, to help shelter it from tax.
If your income doesn't exceed $100,000, you can deduct up to $25,000 of tax losses from the rental activity against ordinary income such as salary, even if the property is appreciating in value-turning it into your own personal tax shelter.
This is true even if you rent to family members and give them a discount rent.
Rule: To deduct tax losses from a rental, you must charge a "fair" rent-but this may be less than a "fair market" rent when you rent to relatives, because of the reduced risk involved. The Tax Court has suggested that a rent discounted 20% below the market rate may be "fair" when renting to relatives.
Improvements
Home improvements may qualify as deductible medical expenses when made to alleviate a medical condition.
The amount of an improvement that qualifies as a medical cost is its total cost minus any increase in your home's value that results from the improvement. Operating expenses also are deductible in the case of items such as air conditioners.
Deductions have been allowed for:
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New siding on a house when the taxpayer was allergic to the moldy old siding.
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Central air conditioning, when a member of the family suffered from respiratory ailments.
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An elevator installed for a person with a heart condition.
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An attached garage, even though the house already had a freestanding garage, when a doctor advised that the taxpayer not walk through the open air in winter.
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A health spa built in a home on a doctor's recommendation to treat arthritis.
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Swimming Pools, such as lap pools, designed for therapeutic purposes and with medical equipment, are deductible under the IRS's own rulings, such as Revenue Ruling 83-33.
But all or a part of the cost of normal recreational pools, with no medical equipment, has been ruled deductible when no other pool was conveniently located for the taxpayer.
Note: Total medical expenses are deductible only to the extent they exceed 7.5% of Adjusted Gross Income (AGI). By getting you over this limit, a home improvement may enable you to deduct many other small, routine medical expenses that otherwise would be nondeductible.
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