Real Estate Taxes Information

HOW IS GAIN FROM THE SALE OF MY PERSONAL RESIDENCE TAXED?
The Taxpayer Relief Act of 1997 provided a new exclusion for gain from the sale of a principal residence. The exclusion is $250,000, or $500,000 for married taxpayers filing a joint return. This exclusion can be used only once every two years. The principal residence must have been lived in as such for two of the five immediately preceding years. Gain in excess of the exclusion is taxable, usually as long-term capital gain.


WHAT IF PROPERTY IS MORTGAGED?
If mortgaged property is sold, the amount realized is the net purchase price, regardless whether the seller receives any of it. This is consistent with the rule that borrowing money is not taxable. For example, if you buy a house for $150,000 putting up $50,000 of your own money and borrowing $100,000 from a bank secured by a mortgage, and sell it for $210,000, assuming that your basis (discussed below) is then $80,000 after depreciation, your gain is $130,000, being the amount realized ($210,000) less your basis. The amount of cash received will be $210,000 minus the amount of the mortgage but that amount will have no particular relationship to the amount of gain.



WILL REFINANCING MY HOME IMPACT MY INCOME TAXES?
That depends. If you itemize deductions for federal income tax purposes, the interest you pay on your mortgage is deductible from your taxable income.

In the early years of a mortgage, nearly all of your payments represent interest and interest is tax deductible. In the final few years, payments consist mostly of principal so the interest is a smaller portion of each payment (and thus your tax savings is reduced). In determining how much you will save on refinancing, don't forget to factor in the increase or decrease in income taxes that may result.



ARE THE POINTS I PAY ON REFINANCING TAX DEDUCTIBLE?
While the points paid on the closing of your primary residence from your taxes in the year you paid the points, those on refinancing or on the purchase of a second home or rental property are only tax deductible over the life of the mortgage. So if it costs you $3,000 in points when you refinance a 30-year mortgage on your home, you may only deduct $100 each year for the next 30 years. If you sell the home or decide to pay off the loan earlier, then the balance of your points is deductible in the year the loan is paid off.