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.
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.