Sander & Associates, P.A.

Mortgage Debt

Many authorities are concerned about the potential that several factors are contributing to potential problems for homeowners. These factors include recession, a stagnant or declining real estate market, and increasing interest rates. The concern is that homeowners will have problems making their mortgage payments or paying off their homes when they are sold. The following are some recommended strategies to consider: (1) Don't purchase the most expensive home you can afford; (2) Make a large down payment (20% or more) on your home; (3) Refinance your existing mortgage to lock in lower rates using a fixed rate loan to replace your existing variable rate loan; (4) Obtain a 15-year mortgage instead of a 30-year mortgage to build equity faster; (5) Increase your mortgage payment by adding additional principal each month or making additional principal payments; (6) Pay half your mortgage payment every two weeks; and (7) Do not use your home equity loan to pay of other debts if you do not intend to pay this loan back and will run up other debts again. Caution – for items (5) and (6), make sure that your lender will allow this and that they apply the extra payments when received, rather than at year-end or the end of the loan.

Vacation Home

Paying attention to how you use a vacation home can result in large tax savings. Generally, the property is considered a personal residence it is used by the taxpayer the greater of 14 days per year or 10% of the period during the year the property is rented out. Rentals to relatives or rent-free use of the home by someone else counts as personal use and not rental use. There are complicated formulas limiting deductions for operating expenses and depreciation if the home is considered a personal residence. If on the other hand the property is considered rental property, then passive loss limitations may apply. In short, up to $25,000 may be deducted if your adjusted gross income is $100,000 or less as long as you are actively involved on the rental activity. Otherwise, passive losses are only allowed to the extent of passive income. In addition, the average tenant use on rental property must be more than 7 days unless the taxpayer can prove that they materially participated in the rental. Material participation is harder to substantiate than active participation. As you can see, vacation homes have extremely complex tax implications. Please call your tax advisor with any questions regarding the deductibility of your vacation home as this is an area that the IRS looks at closely.

Exclusion of Gains

Some home sales are eligible for a partial exclusion of gain even though the two-year uses and residency tests haven't been met. Sales due to job changes, illnesses or unforeseen situations (including disasters, multiple births from the same pregnancy, loss of a job and divorce) qualify.