The Mortgage Reports Blog

With The New Housing Law, The $250,000/$500,000 Capital Gains Exclusion Is Gone

The Housing and Economic Recovery Act of 2008 passed into law this week with a lot of positives for the American people.

Some of the law's highlights include:

• Up to $7,500 in purchase "credits" for first-time homebuyers
• Conforming loan limit increases to $625,000 in high-cost areas
• Expansion of the FHA to "save" delinquent homeowners
• Earmarked funds for local governments to buy and restore blighted homes and neighborhoods

But the new housing law isn't all good news for Americans.  Buried deep on page 690 of the 694-page law, for example, is an important change to the Capital Gains Exclusion rule that could cost home sellers across the country a pretty penny.

Not surprisingly, the story isn't getting much coverage.

How To Increase Your 2005 Mortgage Interest Tax Deduction

Most homeowners know that interest paid on a mortgage can be tax-deductible.  But, with careful planning, a homeowner can increase his 2005 tax deduction.

Because mortgage interest is paid in arrears, the payment due January 1, 2006 is really for interest accumulated throughout December 2005. 

And it's only tax-deductible in the year in which it was paid.

So, rather than make the mortgage payment on January 1, 2008, a homeowner can send the payment in a few days early (i.e. in 2005) and render that payment tax-break-eligible in 2005 -- the year in which it was paid.

As always, consult your tax professional before making any tax planning decisions.

Maybe You Should Sell Your Home Before It's Worth Too Much!

Magazines everywhere talk about the "Housing Boom" and how it is impacting Real Estate investors. 

There is a secondary effect, though, and it hits "regular people". 

As property valuations rise, homeowners can lose an enormous savings in the form of tax-free gains from the sale of their home.

Current federal tax law allows an individual to escape taxation on the first $250,000 of profit from a home sale provided it has been a primary residence at least two of the previous 5 years; the limit doubles to $500,000 for couples filing jointly. 

Any excess profit is a taxable capital gain that cannot be avoided, even by reinvesting in a new home.

So, if a home increases in value and the homeowner sells after the run-up, he may be subject to a substantially larger tax liability than if he had sold before the escalation.

Says Deerfield-based CPA Don Schaffer, "The bottom line is: if you want to make the most of the tax laws, don't hold your home too long in a rapidly increasing market."

Before doing anything, though, be sure to contact your estate planner or tax consultant for help in navigating the murky waters of federal tax law.