Getting The Finances Right

These days, home ownership offers one of the few remaining tax shelters. Property taxes on one’s home and even on vacation property are completely deductible. Interest paid on up to $1 mil lion in loans to acquire or improve a home (or two homes) is deductible and that more than covers most of us. If the value of oneís property rises over the years, additional borrowing of tip to $100,000 in equity loans, refinancing, or second mortgages also qualifies for federal tax deduction.

For homeowners in a 28 percent tax bracket, this means that Uncle Sam is making almost 28 percent of their monthly payment, with deductible property taxes and interest forming almost the whole of the payment in the first few years of the loan. Unless contribution shows up in the form of lower income tax owed or unexpected income tax refunds. Using the formula in Figure 1.1 will give you a rough idea of how much you could afford to spend on monthly mortgage payments. The calculation does not include further possible savings on state income taxes.

Exclusion

When you sell your home, you can take advantage of a delight ful law that allows tip to $500,000 profit for joint filers ($250,000 for a single homeowner) free of any federal income tax ever. The exclusion from capital gains tax, which went into effect for sales after May 7, 1997, can even cover previous, postponed tax on ear lier home sales under the more complex laws in effect before that date.

This free lunch on the IRS is available to homesellers of any age, and you can do this more than once in your lifetime theoretically as often as every two years. (There is even an exception to the two-year limit, if a quick move is needed because of a job change or illness.)

You must have owned and occupied the property as your main home for at least two of the five years before the sale. If only one spouse is the owner, the couple is still entitled to as much as $500,000 tax-free profit on the sale, but both must have occupied the property for the required two years.

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My Two Cents

your new equity

Surveys by the U.S. League of Savings Institutions and the National Association of REALTORS have documented the trends of the 1990s. Only 44 percent of homehuying households are made up of married couples with dependents. Unmarried couples, with or without dependents, now form a measurable segment of the homebuying population. As the 21st century approaches, older homebuyers make up an increasing share of the market, affecting the design of new housing and creating “trickle-down” opportuni ties for younger homebuyers in the form of the larger homes they leave behind. Real estate finance has also changed. Where Grandpa was offered a simple mortgage at a standard, fixed interest rate, today’s buyer can choose among hundreds of innovative plans, each designed to meet some borrowerís particular financial needs. The desire to retreat from the pressures of an increasingly crowded society, inflation, tax considerations, the need for self- expression: all enter into the decision to buy a home. When you own your own home you can play the stereo at midnight, keep a dog (keep two dogs!), plant a garden, drive nails into the walls wherever you want, and use your own washer and dryer. And the portion of your monthly mortgage payment that goes to reduce the principal debt acts as automatic, forced savings.

It takes just three things to buy a house: some cash, depend able income, and good credit. And if you’re lacking any of these three, no need to despair. Home ownership is still possible: there are techniques for overcoming each problem. Just be sure to level with the real estate agent you work with about your financial problems. A competent agent can recom mend appropriate financing strategy for your particular situation.