Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Home Sweet Subsidized Home
Published Date : July 18, 2015
Home ownership has long been appealing to families, not only because it fulfills a “dream” but also because home ownership has favored status in the tax code. As with many personal financial matters, purchasing a home cannot be reduced purely to “bottom-line” calculations. Emotions, particularly the heightening sense of economic security, can come from financially-appropriate home ownership. Current low interest rates have fueled significant recovery in housing prices – and further appreciation in many locations. Since the primary residence is often a significant asset for families, it is important to understand the full financial proposition behind home ownership when considering a purchase or sale. Following are some of the more interesting and important provisions that make homeownership uniquely attractive.
It is widely understood that homeowners are entitled to deduct both their interest expenses on mortgages of up to $1 million, plus an additional $100K of home equity debt. Real estate tax payments are also deducible against taxable income. It is less well known but important to understand that taxpayers subject to Alternative Minimum Tax (AMT) treatment can see those deductions reduced under the AMT rules. Your Sand Hill Wealth Manager and CPA can work with you to understand the full impact of AMT for your specific circumstances.
In addition to interest and real estate tax deductions, favorable tax treatment is given to sellers of highly appreciated primary residences. For many years, homeowners were permitted to “roll over” gains as they sold one residence for a more valuable one, thus deferring taxation of such gains for many years. Couples over age 55 could claim a $500,000 once-in-a-lifetime capital gains exemption ($250,000 for individuals) when they “downsized.” However, in 1997 the rules changed. Now, a married couple of any age can exempt up to $500,000 in gain on the sale of their primary residence (half that amount for individuals). This exemption can be taken as often as every two years as long as the owner occupied the property for at least two of the five preceding years. Additionally, there is a full step up in cost basis available at death, which can be useful to a surviving spouse or for other estate planning purposes. Again, while a full discussion on this topic is beyond the scope of this article, your Wealth Manager or estate planning attorney can discuss the details with you in more depth.
As a result of three state propositions, Californians have additional tax benefits. In 1978 Proposition 13, or the Jarvis-Gann Amendment, fixed property tax rates based on the price at purchase as well as the rate at which taxes on properties owned could rise. The result is that taxes assessed on long-owned homes are generally considerably lower than those assessed on homes purchased at current prices. Second, the 1986 ballot initiative Proposition 60 allows homeowners older than 55 or disabled to sell and transfer the lower property tax burden on a previous residence to a new home (within two years), provided it is located in the same county and is of equal or lesser value. Third, Proposition 90 allows owners to carry over the property tax basis to a home in another county if that county accepts such transfers. Only Alameda, El Dorado, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, and Ventura counties currently participate. For example, if a couple sells their house in San Francisco County, they can transfer their lower property tax rate to a new home of equal or lesser value in San Mateo County. This once-in-a-lifetime opportunity would not work in reverse, however, because San Francisco is not a participating county.
These real tax advantages enhance the appeal of home ownership and should be incorporated into long term plans. Your Sand Hill advisor can provide personalized advice to assure that you optimize your opportunities.
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