Tax Benefits of Home Ownership

Speaker 1: [0:00] Hello, hello, and welcome to another edition of the Awesome in Seattle podcast. This is Christian Awesome, of the Awesome Awesome Group at Wilson Realty. And today we're talking about a very exciting, oh wait, no, often a boring topic called- … tax benefits of home ownership. Now, although this may sound boring, this can make you a lot of money that you didn't realize that you could do. So for most people, even hearing the word taxes really is intimidating and stressful, but knowing a little about what tax breaks and deductions homeowners are entitled to can make a big difference, whether you already own your home or in considering buying a home. Before we highlight a lot of the tax benefits of owning a home, let's first say hi to the team. First off, welcome back from vacation, the one and only Mr. Jason Saldarriaga.

Speaker 3: [0:45] Hello.

Speaker 1: [0:46] We have the dog whisperer, Mr. Les Cutting.

Speaker 3: [0:49] Howdy.

Speaker 1: [0:51] Very quiet apparently. And the Seattle native, Reid Watson.

Speaker 4: [0:55] Hello.

Speaker 1: [0:56] All right. So there's many, many benefits to owning a home, such as building wealth and home value appreciation, and, I, I mean, it's been in the news over and over, and for the last decade the Seattle area real estate market has ex- experienced some of the highest appreciation rates in the country. In fact, we have been in the top 10, and often in the top five highest appreciating markets in the country numerous times over the last 10 years. But this doesn't mean that this high year over year appreciation rate will continue on forever, even though our economy is super strong and diverse, and we are in a really good position to do so. So clearly price appreciation is one way to, and one of the benefits of, uh, owning a home. But tax benefits are a little more complicated to understand, but they are also very important. So before we get into it, I gotta make it very clear we are not CPAs, we are not tax attorneys, we are not accountants. Uh, none of this is financial advice. This is just us as real estate agents explaining what tax benefits you could potentially qualify for. So that is out of the way, that disclaimer. Don't take this as financial advice. We are just real estate agents, not your CPA or accountant, or a tax attorney. So there we go.

Speaker 2: [2:08] Nor we would not wanna be your CPA.

Speaker 1: [2:10] No, we would not. Too many

Speaker 2: [2:11] numbers.

Speaker 1: [2:13] Especially on a podcast that we-

Speaker 2: [2:14] Although I do enjoy spreadsheets to be honest.

Speaker 1: [2:17] You are the data guru on the team- Mm-hmm … so, yes. Yes, you do. So let's get into it. Let's, uh, let's go over some of the tax benefits of home owning.

Speaker 2: [2:25] Ooh, me. I have a tax benefit.

Speaker 1: [2:27] Okay.

Speaker 2: [2:28] Uh, I think, you know, when I think tax benefits of home ownership, the first thing that really comes to mind is the ability to deduct interest.

Speaker 1: [2:36] Mm,

Speaker 2: [2:36] yep. This is especially powerful during the first few years when you own the property. So every month, just a little backstory, every month a homeowner pays- Their mortgage, and this mortgage goes towards various things, but the two main parts that it goes to is the principal and the interest. The principal is the amount that you borrowed, and the interest is the amount that you, you basically pay for use of the loan. Um, the money that the bank's making, basically. So due to how home loans are amortized, the interest is very much front-loaded. In other words, the amount that you pay in interest is much greater at the beginning of the loan period. For example, just to throw some really simplified numbers out there. If you have a $450,000 loan, you may end up paying almost $20,000 in interest alone over the first year.

Speaker 4: [3:31] Mm-hmm.

Speaker 2: [3:31] Um, and based on the current tax code, you can deduct that $20,000 from what you owe in taxes, and that's a lot of savings. Very nice.

Speaker 1: [3:42] Yes, it is very, very nice. And obviously, the tax code can change and does change, so this is being recorded in 2021. Who knows what it's gonna be like in 2022 or '3 or '4 or '5 or '6. So talk to your CPA about that and make sure that, you know, what we're saying is still valid.

Speaker 2: [4:00] Definitely.

Speaker 4: [4:01] Yeah, I have another thing that you can deduct.

Speaker 1: [4:04] Mm.

Speaker 4: [4:05] Um, you can also deduct private mortgage insurance, which is also referred to as PMI So I'm sure especially if people are just beginning to consider a home loan are probably unfamiliar with PMI. Private mortgage insurance is often required by lenders to protect them if a borrower stops paying on a loan. So as part of the loan, the borrower is charged a fee, PMI, to protect the lender. And those PMI fees that you pay on top of everything else can often be deducted. Another thing that can be deducted is property taxes. Mm-hmm. The amount you pay in property taxes depends on quite a few factors such as the type of property, if it's vacant, if there is potential for development on the property. All of these and other factors are used to assess the value of the home, and then your property tax is a percentage of that value. So currently right now at the time of recording, and always check with your CPA, you can deduct the amount you pay in property taxes up to $10,000. So, you know, that's nothing to laugh at.

Speaker 1: [5:14] Yeah, that's a big chunk. And I'll go over property taxes real quick- Yeah … and kind of how they're figured out, 'cause most people don't really understand that. So your property taxes are assessed in two different parts. One is they value the land, and second, they value the structure on the land, so the home or whatever it is. Then they take both of those and they combine them together to create your assessed value, and then they tax that at a specific rate based on the city, county, and state that you are in. And your property taxes can change each year. They often, when prices are going up, they are gonna go up. When prices go down, they don't always go down immediately. They can be a year or two or three behind in reacting to that. One thing to keep in mind, do not fight- Your property tax assessment, if it comes in lower than what you paid for the house, that's actually quite a nice benefit. Um, homes aren't always assessed at the exact amount that you paid for the house. They're often much lower. So although homes can be appraised for much higher, you can actually appeal the value if you really wanted to. But just don't do it if, if your value's, like, super low, 'cause that's makes it less expensive for you. If you did want to appeal your value because, you know, maybe they say that your house is worth a million dollars or your, your property's worth a million dollars, and you just bought it for $700,000, your county, depending on which one you are in, they have specific forms and a process that you go through to, to showcase this, and it's not really that hard of a process. You just gotta go through it and then wait, and then they review, and we'll see what happens. Another tax benefit that is important to know happens when you decide to sell. So currently, again, this is 2021, and there's been talks of this potentially going away, but that's the way it is with taxes and exemptions. Uh, if you sell your home, you may qualify for a capital gains exemption. The IRS currently allows you to exempt up to $250,000 if you're single and up to $500,000 if you're married on the sale of your primary residence. That means that you can keep that much money tax-free when you sell your home, which is kind of insane. So basically, the requirements are you have to have lived there for two out of the last five years. The nice thing is it doesn't actually have to be consecutive, um, when you decide to sell. So you may qualify for, again, up to $250,000 if you're single and up to $500,000 if you're married on the gains, on the profit, I should say, when you go to sell.

Speaker 2: [7:59] Yeah, and I've, uh… You know, if you take a step back on this and think a little deeper, there's strategy around here, and a lot of people use capital gains, this exemption, to strategically buy and sell homes to increase their profit at the end of the day. You know, in a way, it can be kind of compared to flipping homes, but it's a little different. So these people, they'll buy a home, fix it up maybe, which increases the value of the property- And then they live in it as their primary residence for two years, let's say. That way they qualify for the capital gains exemption that you just talked about. And then they sell it, at which point they get to keep most, if not all of the profit tax-free. So that's kinda nice. Mm-hmm. And then they grab that and they move on to another property and do the same thing. So this is a great way, or really a great example of taking just a little bit of knowledge of tax benefits of home ownership and then using it to your advantage, making it work for you. And it's a great way to earn a lot of, uh, tax-free money.

Speaker 1: [8:56] It really is. Who doesn't want that? It really is. It's kind of insane. I've- I have some friends that have done this over and over again. And- It, uh, it does not suck. It's, uh, a pretty nice way to go. I mean, you take a house, remodel it to the way that you like, and then you get to live in it for a couple years, and then you sell and you make all the profit tax-free. That doesn't suck. So, uh, let's talk about investment properties. So we've kind of gone over when you're owning your primary home, but we really haven't gone over investment properties yet. So it's important to make the distinction between your primary and an investment property. So your primary is the one that you live in. Investment property, obviously, you don't. With an investment property, you can a- actually deduct a little bit more. Um, in addition to all the things you can normally deduct with your primary residence, you can also deduct things like home improvements, pest control, property management costs, advertising fees, things like that. So when you own an investment property, you just gotta make sure that you really keep good records of all the money that you spend on any property that you own. I personally have a separate bank account for my rental properties so that I can just keep them separated and keep track of them so much easier.

Speaker 3: [10:09] Home improvements, let's talk about that and how it can benefit you, your taxes. You should first and foremost keep all your records related to your home improvement, both on your investment and your primary properties. For investment properties, you need those records so you can prove the amount you spent to qualify for deductions on your taxes when you file them. Um, on a primary residence, it's important that you hold onto those records so you can determine your basis when you do decide to sell your house. The basis is a tax term that homeowners should know. It's very, very important. Basically, it means the monetary value of a property, of, of your property for tax purposes. When you go to sell a home, you subtract your basis from the amount you sell it for that, uh, to figure out how much you made on the sale. To determine your basis, you add the amount you paid plus the amount you spend on improvements. There are other elements that you, you may need to include on your basis, but for this discussion, we won't get into that. That's something your CPA can help you explore. Like Christian mentioned before, we are not CPAs, and we don't wanna be CPAs. So ask your CPA. Nope.

Speaker 1: [11:12] Exactly.

Speaker 3: [11:13] So to determine how much you make on the sale of your home, you need to know what you spent on the improvements. So let's give you a couple examples real quick. So this goes back to the capital gains tax. Let's just say you paid $400,000 for your house. Then you spent $100,000 on the improvements. Your basis is 500,000. If you sell the house for seven, $750,000, your capital gain is $250,000. If you're single, you'll get that $250,000 tax-free. But if you neglected to include and prove your improvement cost, you're definitely gonna be taxed on that $100,000 you spent upgrading the property. Because as Christian explained, single people can get on an exemption if, of, of up to $250,000. So if you don't prove that you spent $100,000 improving your home, you may be taxed on that amount because the capital gains would be $350,000, and that's over the limit for capital gain exemption. This gets a little bit complicated, but the point is to always keep record of any home improvement and consult with your accountant. Yeah, that's, that's- So Sarah and I, what we do is, um, when we did our big remodel last year, uh, we literally have one drawer that's just designated for all of our home improvements. Every single home improvement, you can find them in one single drawer in our house. We keep them there. When it's time to file, we go in there, we give them to our accountant, and we're good to go. So I- That's smart … suggest you guys get a system like that.

Speaker 1: [12:31] That's smart. Yeah. Keep it all in one spot. Mm-hmm. Stay organized and let your accountant or CPA handle all the details. What, uh, what other records are important to keep, you guys?

Speaker 4: [12:42] Yeah, just good to keep records in general, all of your tax records. You'll definitely need the tax statement that your mortgage company sends you in order to show that amount of interest paid. You should also keep any insurance documents. You should keep your deed, any other records related to you owning the property and, as Les said, any improvements on the property. Try to keep it all in one place, and if you're ever not sure if you need to keep something, just keep it. It's always best to have it and not need it than to need it and not have it.

Speaker 2: [13:17] Good point.

Speaker 1: [13:18] Yeah, so I feel like we shared a lot of great tax benefits for homeowners today. The biggest one is, and this is what I want you, if you have not bought a home yet, but are considering, I really want you to talk to your lender. And if you need a recommendation, we can give you one. But talk to your lender and really have them explain how much exactly, based on your budget, would you be saving in your interest and your, your mortgage interest and your private mortgage insurance, if you have that, um, each year. Because that can really decrease how much money at the end of the year you will be paying for your mortgage. So you could possibly be saving quite a bit more than you're paying in rent if you were potentially to take that tax deduction at the end of the year and divide it over 12 months. You could look at it that way and go, "Okay, well apples to apples, my rent compared to my mortgage payment minus the taxes that I save, that actually would be an apples a- to apples comparison." So I know that sounds a little confusing, but there really are some really good lenders out there that can show you that with numbers to make this a lot easier. So if you are thinking about home buying, please attend one of our classes. They are very free. Very, very free. There's no taxes paid on them. And if you come to our in-person classes, you get free food and drinks as well. So it's great. If you wanna come to one of those, you can always go to beersandhomebuying.com. That's beers, as in the drink, and homebuying.com. We do one pretty much every single month, so check it out and sign up for one of those. We will really educate you about the whole entire home buying process and really inform you, uh, and help you come away with whether or not buying a house makes sense for you. Uh, that is it for this week. We will see you in two more weeks when we have another episode of the Awesome in Seattle podcast. Thanks for listening.