Tax Benefits for Homeowners

Guide to Tax Law

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• Introduction to Tax Law
• What is the IRS?
• Filing Your Tax Return
• Rights of Tax Payers
• Tax Free Income
• What is a Tax Credit?
• Tax Implications of Differed Income
• How Tax Deductions Work
• Recucing Your Taxes with Investments
• Shifting Income withing a Household
• Your Status as a Tax Payer
• Small Business Owners and the IRS
• Minimize Taxes on Your Estate
• Tax Fraud and other Crimes
• Red Flag: IRS Audits
• Taking Your Case to Tax Court
• What if Your Owe the IRS?
• When to Hire a Tax Attorney

Basics of Property Tax

There are two basic components in any tax: the base and the rate. By multiplying the base times the rate, the amount of tax is determined. For homeowners, the property tax base is the value of all taxable property. The realization principle states that when you own property and it merely fluctuates in value (i.e. upwards fluctuation), you don't have any current gross income merely because of this fluctuation in value. The reason for this is because the gain has not been realized. However, when that gain is realized, you will be taxed, but only the gain will be taxed, not the entire amount received when the income is realized. The realization principle is not referring to income generated from property that you continue to own.

In order to determine the gain in the property, you must know the basis. The basis is what the taxpayer has invested into the property (i.e. capital investment into the property). To the extent you recover your basis, you are not taxed. Any amount above and beyond the basis is taxable. The difference between the sale price and your basis is a taxable gain. For example, if you had purchased a home for $200,000, and then sold it for $220,000, the taxable income would be the $20,000 difference, or gain.

Section 1012. Basis of Property

This provides that the basis of purchased property is cost unless otherwise provided (see §1016 for post-acquisition adjustments). Where property is received in exchange for services, basis in property acquired is Fair Market Value ("FMV") of property received.

Capital investments include all investments such as the original purchase price plus any additional investments such as adding a garage, an addition, or an extra bathroom. Total investment in property is basis. This does not include repairs to the property.

Reducing Property Tax Liability

Property tax liability can be reduced in a number of ways, depending on which state the taxpayer lives in and which states offer certain tax reduction programs to homeowners and renters. Every taxpayer should look into the available programs in their state, including (but not limited to):

• Homestead credits (offered in 14 states and Washington D.C.)
• Circuit Breakers (offered in 35 states and Washington D.C.)
• Homestead Exemptions (offered in 40 states and Washington D.C.)
• Property Tax Deferral Programs (offered in 24 states and Washington D.C.)

Tax Benefits for Homeowners

The tax benefits for homeowners can be significant and can make a meaningful impact on the overall yearly tax liability of a taxpayer. The most significant tax benefits for homeowners include:

• Ability to Deduct Mortgage Interest from Income
• Writing off Refinancing Interest
• Writing off interest from a home equity loan or a line of credit (usually, loans of $100,000 or less are fully deductible)

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