As the annual tax filing deadline looms near, you might be wondering how filing your taxes and homeownership affect one another. Whether you're a prospective buyer, a current homeowner, or considering selling your property, understanding the implications of tax filing is essential. While I’m not a tax professional, I have seen the impact it has on buyers and sellers.
If buying a home is on your mind, your income and debt are the two largest factors lenders consider when qualifying you. Here in Music City, many of us are self-employed or contract employees who can lower taxable income by deducting certain expenses. The income on your last 2-3 tax returns is what lenders use to determine how much you will qualify for when getting a loan. It’s important to find the right balance between lowering your income to pay less in taxes and having enough income to qualify for the home you want. In other words, don’t claim so much that your income looks too low to qualify for the purchase you want to make. If this is you, be sure to talk with a tax professional and your lender to find the right balance.
Owning a home comes with many advantages, tax deductions being one of them. Common deductions include mortgage interest, property taxes, some home improvements, and home equity loan interest. Be cautious when adding deductions since many of them come with strict guidelines. For example, if you want to claim deductions for a home office, the amount of space you use and the way you use the space are important. A home office cannot serve multiple purposes when it comes to taxes. If your office doubles as a guest room, it’s probably not deductible. Hiring a tax professional who knows the limitations will help ensure you don’t leave money on the table.
When it comes to selling a home, understanding tax implications is vital to saving money. Capital gains are the difference in what you paid for the house and the selling price, minus certain expenses. Those gains are considered taxable income when selling a property for more than you purchased it. However, it’s possible to exclude a portion of those gains and save a significant chunk of change! If you’ve lived in a home as your primary residence for at least two of the last five years, you can exclude up to $500,000 of capital gains, if married and filing jointly, or $250,000 if single. Additionally, certain improvements can be deducted from your gains when selling. Be sure to keep track of the updates you make in your home so your tax advisor can help determine whether or not they’re deductible.
Tax codes and regulations change each year. Just like you should hire an expert Realtor when buying or selling a home, it’s important to hire a professional when it comes to filing taxes. Working with a great CPA who is knowledgeable about current tax laws can save you money and keep you out of trouble!
Lynn is an affiliate broker with Compass and enjoys strategizing so buyers and sellers can maximize their outcomes. She is actively involved with Greater Nashville Realtors, serving on the Housing Opportunities and Affordability committee, and is the 2024 YPN Chair. You can find her on Instagram @lynnsmith.realtor or email her at lynn@lynnsmithrealtor.com.
