Get the maximum from your home
If you are paying mortgages and (of course) property taxes, you can deduct a part of it as your business expense. And when you sell your home, you can keep the gains.
It is perhaps due to sudden hike in the house prices that Congress thought of giving some break. There are suggestions to put limits on it, but it takes a long time to convert them into a law. So you can enjoy until then.
You can claim all property taxes which you pay, including state and local taxes. Even if you stay in an apartment and share the building as one of the tenant shareholder, you can claim the share of your property tax paid. Also, if you own 5 homes, you can deduct taxes on all 5.
Keep in mind the provisions of AMT (Alternative Minimum Tax). It forces you to forgo part of your deductions and thereby ensures everyone pays tax.
Now lets talk about interest on purchase of your home as well as additional land adjacent to it. If the debt is more than 1 million, there are some restrictions. You can better talk to your accountant (and you can afford to!) . You can get deduction up to $1,00,000 out of the interest on home-equity debt.
Very important â€“ IRS is not concerned about how you use this debt. As long as your home has the equity and that debt is secured by the equity, its fine with IRS.
The provision of â€˜gain exclusionâ€™
Before 2002, if you made gains on sale of home, you were required to roll them over into a new home, unless you are 55+ in age. There is no such limit now. And the gains you make are treated liberally. If the property which is your principal residence for any two of the five years of sale, is sold for a gain up to $ 250,000 ($500,000 in joint return), you can claim it as excluded from tax. If you make a gain below $250,000 (or $500,000 in a joint return) then the amount of sales is not even required to be reported to IRS. You donâ€™t have any tax liability on that sale!
Partial exclusion â€“ If you make a sale even before the above limit of two years, you can still get a deduction, if the sale is due to change of your employment or health reasons. Suppose you bought a home for $300,000 and made a gain of $50,000 by selling it after a year due to change in employment, then as the sale is due to change of employment, it comes below the ceiling on gain of $250,000, and it is exempt. This is really a break. Very few properties can appreciate above $ 250,000 in a year.
There is one more loophole â€“ change of employment covers anybody who is staying in the house. The person need not be the owner! However, the change of employment must be the primary reason to move. If your new workplace is 50 miles away from your residence, it can be treated as a primary reason.
Now lets turn to health reasons. They may be age related, or need-based to care for a family member suffering from a disease or injury. These reasons are valid for exclusion of gain.
You can take the support of unforeseen circumstances also. They include divorce, death or inability to pay the living expenses of households.
Use of Home as office
If you are using say 30% of your home as office, you are entitled to deduct proportionate depreciation and other expenses as business expense every year. But then what if you sell that house?
In the past, IRS was asking you to set aside 20% of your gain as â€˜not eligible for exclusionâ€™ However, now the situation has changed in your favour. Even if you use 90% of your home for business, and you make a gain of $250,000 ($500,000 for joint returns), your entire gain is eligible for exclusion.
So there is every reason for claiming a home office. There is no place like sweet home!