TAXES: HOW YOUR HOME AFFECTS YOUR TAXES NEW TAX LAWS SHELTER YOU AND YOUR MONEY

The Great American Dream of homeownership has been given a big boost by Uncle Sam. Sweeping tax law changes took place in 2001, enhancing major changes of the 1997 Tax Relief Act affecting the tax treatment of home-sale capital gains. Selling a home and moving to a new one is now more financially attractive than ever before.

Most homeowners can now sell their home every two years and pocket up to $250,000 (for single tax filers) or $500,000 (married filing jointly) in profit with no capital gains tax. The "once in a lifetime" 55 age limit has been eliminated, meaning you can use these exclusions every two years.
Homeowners can scale down their housing without penalty. No longer do you have to buy a home of equal or greater value than your previous home.
First-time home buyers benefit from the changes in the law, as well. The federal government now allows penalty free early withdrawal from an Individual Retirement Account - yours, your parents', even your grandparents'- to help you buy a home. The income taxes on that money still apply, however.

Now more than ever it's easier to purchase a home. Use this brief report to determine how tax reform affects you as you consider moving up, moving down or buying for the first time. Please keep in mind this capsule information was accurate at press time, but tax laws change continually. You should seek the advice of a professional tax advisor before filing your tax return.

If you need professional real estate advice, please call. We're your neighborhood real estate experts and we would be happy to help!

TAX RATES
TAX FACTS: Tax rates favor homeowners. Currently, there are six tax brackets, ranging from 10% to 39.1 % depending upon taxable income amount and filing status (single, married filing jointly, head of household). Homeownership is made affordable for many families because of how Uncle Sam's tax deductions result in the federal government contributing 10%, 15%, 27.5%, 30.5%, 35.5% or 39.1 % toward monthly home mortgage interest and property tax payments!
TAXABLE INCOME RANGE
SINGLE MARRIED/JOINT TAX
FILER FILER RATE
$046,000 $0412,000 10°-0
$6,000 - $27,050 $12,000 - $45,200 15°a
$27,050 - $65,550 $45,200 - $109,250 27.5°0
$65,550 - $136,750 $109,250 - $166,500 30.5°0
$136,750 - $297,350 $166,500 - $297,350 35.5°a
$297,350 and up $297,350 and up 39.10o

HELPFUL HINT: Many homeowners overpay taxes simply by overlooking deductible items. Get one of many tax preparation books available that list deductible items to jog your memory.

INTEREST
TAX FACTS: Interest payments on a residential mortgage-assuming the mortgage isn't larger than the purchase price of the home-are fully deductible in most circumstances. That's a key reason why homeownership is a superb tax shelter. Mortgage interest on a second home is also deductible, as explained in the "VACATION HOMES” section. If you own a third home for personal purposes, the mortgage interest is treated as "consumer loan" interest and is not deductible. Interest on home equity loans (see "EQUITY LOANS" section) is deductible, with some limitations.

HELPFUL HINT: If you are planning to buy a home with a large amount of cash, consider carefully if you plan to ultimately finance the property. For interest to be deductible on a financing more than 90 days after closing, it will be limited to the acquisition loan balance plus $100.000. under home equity loan rules.

GAINS
TAX FACTS: Taxpayers who sell their principal residence, can pocket--tax-free--as much as $500.000 in profit if they file federal taxes jointly, or $250,000 if they file singly. The property must have been owned and used as their principal residence for any two of the prior five years. Homeowners can shelter the profits on the sale of a home as often as once every two years. If the two-year use and ownership tests are not met, but the home is sold because of special circumstances (i.e., health, job loss, etc.), the exclusion is prorated.

For instance, John owns a home for just one year and meets the above requirements to sell and take his "reduced exclusion." He could claim only 50% of the $250,000 exclusion amount and pay no tax up to that amount (i.e., $125,000). He still benefits from the new law, but on a limited basis.

Otherwise, gains above $500,000 or $250,000 are taxed at the 20% or 10% capital gains rates, depending on your tax bracket, down from the former 28%. Starting in 2001, a rate of 18% or even 8% may apply to sellers who owned their homes more than five years.

HELPFUL HINT: Homeowners should continue to maintain records of selling and improvement expenses because some states still tax capital gains on home sales. In addition, those expenses can be used to determine your tax basis once you sell the home. There's also a chance the gain could exceed the $500.000 or S250,000 profit cutoff.

RENTALS
TAX FACTS: If you have an adjusted gross income of $100.000 or less (not counting any loss from "passive activities." deductions for IRA contributions or taxable Social Security benefits), you can deduct up to $25,000 in losses from rental real estate against income from other sources. This is an allowable deduction if you owned at least 10% of the property and "actively participated" in its management. (If you chose the tenants and approved outlays for maintenance. for example. that's considered "active" participation.) If your adjusted gross income is between $100,000 and $150.000. you can still deduct some or all of your losses from rental real estate. depending on the amount of the loss.
HELPFUL HINT: Don't forget, if any rent losses were "suspended- in prior years, they are fully deductible in the year the property is sold.

VACATION HOMES
TAX FACTS: Vacation homes have separate tax rules depending on the owners personal use days. A residence is a vacation home if it was used personally more than 14 days or 10°0 of the days it was rented (if rented more than 140 days). For a vacation home, all mortgage interest and property taxes are deductible. either as rent expenses or as additional itemized deductions. If there was rent income, other property expenses may be deductible, including depreciation, but only up to the amount of the rent income (losses are not allowed).

HELPFUL HINT: For non-vacation homes, you may claim rent expense deductions other than interest and taxes, even if it results in a loss. When personal use of a vacation home is involved, deductions are determined by allocating expenses, including interest and taxes. between the rental and personal use periods.

MOVING
TAX FACTS: If you moved to a new home because of a new job or a job transfer, you may qualify for a moving expense deduction. The distance between the old home and the new job must be at least 50 miles more than the distance between the old home and the old job. The location of the new home is not considered. Whether a homeowner or renter, you can deduct the cost of moving household goods and the direct cost of moving you and your family. You can also deduct expenses for lodging during the move but not meals.

HELPFUL HINT: While realty commissions, lawyers' fees and other closing costs are no longer deductible as moving expenses, these costs can reduce capital gains by adding to the cost basis or reducing the adjusted sales price. See IRS Publication 530, "Tax Information for First-Time Homeowners."

POINTS
TAX FACTS: For home buyers, deductible expenses include settlement charges for points. Deductible points are up-front charges for the use of money (not services). One point equals 1 % of the loan amount. Points paid by either the buyer or seller are deductible by the buyer in the year of the purchase.

HELPFUL HINT: If you are buying a home and need financial assistance from the seller, consider having them pay for as many points as possible, thereby increasing your tax deduction.

ROLLOVER
TAX FACTS: For homes sold on or after May 7, 1997, there is no rollover provision. However, the first $500,000 or $250,000 of gain is not subject to federal capital gains tax (see "GAINS").

HELPFUL HINT: You can use this new provision to your benefit. Since you are not required to replace a home that is equal or greater in value than the previous home to avoid capital gains tax, you can now consider scaling down earlier than when you retire. Since taxes may be incurred above the $250,000 or $500,000 gain ceilings, continue to keep records on improvements to the home so that you can determine your cost basis once you decide to sell.

EXEMPTION
TAX FACTS: For homes sold on or after May 7,1997, there is no 55-years-of-age exemption. However, the first
$500,000 or $250,000 of gain is not subject to federal capital gains tax (see "GAINS"). Sellers who had already made use of the one-time exclusion may make full use of the provisions of the new law.

HELPFUL HINT: Now that the 55-year-old exemption no longer applies, homeowners wanting to retire early no longer have to worry about this old exemption forcing them to keep a house that no longer meets their needs.

INHERITANCE
TAX FACTS: The estate tax exemption will be gradually increased each year until the tax is eliminated in 2010. The exemption increases are as follows:
2000 & 2001 - $675,000
2002&2003-$1 million
2004 & 2005 - $1.5 million
2006 thru 2008 - $2 million
2009 - $3.5 million

HELPFUL HINT: You can reduce your tax liability on inheritance taxes through the use of trusts and living wills. In particular, if the total value of your estate is larger than the exemption amount, you should arrange your estate so both you and your spouse are able to each use the full exemption credit regardless which of you dies first. Consult a tax professional or estate attorney for more information.

DEPRECIATION
TAX FACTS: Taxation of depreciation claimed on real property works as follows:

For a principal residence on which depreciation was taken up to May 7,1997, the gain is not taxable as long as it doesn't go over the $500,000 or $250,000 threshold.
For a principal residence on which depreciation was taken after May 7,1997, the amount of gain equal to the depreciation taken is taxed at a maximum 25% rate instead of 20%, and the gain is not eligible for gain exclusion.
For a rental property or second home on which depreciation was taken either up to or after May 7,1997, the gain equal to the depreciation taken is taxed at a maximum 25% rate instead of 20%. Regardless of whether the property was a principal residence, rental property or second home, the depreciation taken increases the amount of gain upon sale.

HELPFUL HINT: If you've been claiming depreciation for a home office, you may want to stop. Unlike the old rules that let you avoid taxes by converting to personal use prior to sale, all depreciation after May 6,1997 is subject to tax when the property is sold. Additionally, if, at the time of sale the home office had not been part of the principal residence for at least two out of the previous five years, the home office percentage of the gain will be considered fully taxable regardless of the $250,000 or $500,000 exclusion.

EQUITY LOANS
TAX FACTS: Interest is fully deductible on home equity loans up to $100,000-in contrast to other types of loans regardless of how the proceeds are used. A home equity loan, including a second mortgage or equity credit line, is a loan secured by a primary or second home. The loan, when added to other debt secured by the residence, can't exceed the fair market value of the property. (Some state laws restrict home equity loans. Give us a call to learn more.)

HELPFUL HINT: Interest paid on credit cards or other types of personal loans, such as car loans, is not deductible. For many owners, it makes tax sense to pay off this kind of debt with a home equity credit line or loan. Remember the total interest paid on a high loan-to-value loan (those which exceed the value of the home, e.g., 125% loan) may not be deductible. Check with a tax professional for details.

HOME OFFICE
TAX FACTS: The definition of home office was liberalized beginning in 1999. Now if you keep records, schedule appointments and carry on other such activities from your home office, some common home office expenses, such as utilities, insurance, repairs, cleaning, and depreciation, may qualify for a deduction, even if you do the actual work in another location. Be aware, however, any depreciation claimed after May 6, 1997, will be taxed at 25% if the residence is sold for a gain, whether or not the property has been converted to personal use. Note, too, that to qualify for the $500,000 or $250,000 exclusion on the sale of your residence, it must have been owned and used as your principal residence for two out of the previous five years. If the home office portion of the residence flunks this test. the home office percentage of the entire gain will be fully taxable.

HELPFUL HINT: If you prefer, you can still claim the deduction under the old, more narrow criteria, such as having clients visit your home-based business and conducting your transactions there, or running your home-based business from a separate building on your property, such as a detached garage.

LOCAL TAXES
TAX FACTS: Real estate property taxes and state and local income and personal property taxes are fully deductible.

HELPFUL HINT: If you sold or bought property during the year, you may have paid real estate taxes without being aware of it. See closing statement for any prorations.