The Mortgage Forgiveness Debt Relief Act of 2007 also extended a tax deduction for private mortgage insurance (PMI), which was originally set to expire in 2007. The extension allows eligible homeowners to deduct the cost of their mortgage insurance premiums through 2012.
What is mortgage insurance? Lenders require borrowers to purchase PMI if the borrower's down payment is less than 20% of the purchase price and other loans are not used to make up the difference. The reason is that mortgages with down payments of less than 20% are deemed riskier than loans with larger down payments. Although the mortgage insurance protects the lender, the homeowner must pay the premiums, which are based on the price of the home.
Who qualifies for the deduction? Home-owning families with an adjusted gross income of $100,000 or less qualify for the deduction. Families with incomes up to $109,000 are eligible for a partial deduction. To learn more, read the IRS's publications Home Mortgage Interest Deduction and Publication 53: Tax Information For First-Time Homeowners, available from the IRS website at www.irs.gov.
Second-Home Tax-Break Loophole Closed
Under current law, homeowners can exclude from taxation a certain amount of the gains from a home sale, provided the property was the primary residence for two out of the previous five years. The maximum exclusion is $250,000 for a single person and $500,000 for a married couple filing jointly.
In past years, vacation and rental property owners figured out that they could legally double dip the exclusion by first selling their primary residence and avoiding tax on the capital gain. Then, after moving into the second home for two years to qualify it as their primary residence, they could sell the home and avoid paying taxes on the full amount of the capital gains earned on the second home.
This legal means to double dip ended on January 1, 2009. After that date, if you live in a home that you've also used as a vacation or rental home, you do not get tax relief on the capital gains earned while you did not live in the home. You can, however, get tax relief on the capital gains earned while you are using that home as your primary residence.
Example: Bob owns a vacation home for ten years. During the last two years of his ownership, he uses the vacation home as his primary residence. He sells the home and gets a $100,000 gain. Under the new law, $80,000 of that gain would be subject to capital gains tax (equal to the eight years the property served as a vacation home). The remaining $20,000 would qualify for the tax exclusion (equal to the two years he used the home as his primary residence).
Homeowners who moved into their vacation home before the end of 2008 will still be eligible for the benefits of the old law. For more information, see IRS Publication 523, Selling Your Home, available from the IRS website at www.irs.gov.
To learn more about tax credits and deductions for homeowners and how to keep your property tax bill low, get Nolo's book The Essential Guide for First-Time Homeowners: Maximize Your Investment & Enjoy Your New Home, by Ilona Bray and Alayna Schroeder.
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