Homeownership and Taxes — A Q&A With Tax Attorney Bruce Edwards
Tax season is fast approaching, which means it’s time to call your accountant and get your files in order — or get started on your tax filing yourself.
Homeowners have additional considerations to keep in mind as various costs associated with owning a home can be tax deductible. That doesn’t mean, though, that the decision to purchase a home should be driven primarily by the tax benefits, notes Bruce Edwards, a tax attorney and a partner of Sorensen & Edwards, P.S. in Seattle.
Owning your home can certainly help lessen what you owe the IRS come April 15, but, Edwards says, taxes are just one of many considerations to be weighed when deciding whether to rent or buy. Edwards offers his thoughts to The Home Story on how to factor taxes into real estate decision-making.
The Home Story: Generally speaking, how well-informed are homeowners when it comes to the tax advantages of homeownership?
Bruce Edwards: I think most people have a somewhat misguided notion about what the real economic benefit of making something tax deductible is.
When I advise clients I always tell them, don’t focus exclusively on the potential tax benefits when you are deciding whether or not to buy a house for a residence. There are other factors that you need to take into account in deciding whether or not to leave the relative safety of renting and instead become a full-blown owner. These factors are not necessarily purely tax-related, but they are in my experience really the deciding factors for most people as to whether they are going to buy a place or continue renting.
That is why I always bring into the discussions the example of, for instance, if [in buying] you wind up paying twice as much for your housing that may not be a very good economic decision, even though now a portion of your overall cost will become tax deductible.
The other aspect of the homeownership decision that most people don’t fully consider is the repair obligation you are undertaking, meaning that when you buy a place, it’s yours, and so you want to go ahead and keep it in the best condition you can.
THS: And home repairs typically aren’t tax deductible?
BE: That’s right, so you are much more at risk for major kinds of repairs if things go wrong. If I become a homeowner, there are things for which I will become liable that aren’t tax deductible, and I probably wouldn’t have those same expenses if I were a renter.
THS: Keeping those considerations in mind, what are the tax advantages of owning as opposed to renting?
BE: Rental payments are not tax deductible, even though a portion of the rent that you are paying is ultimately going to go to the landlord, and the landlord is going to use it to pay things like the landlord’s property taxes and the interest on the loan used to buy the building, which are tax-deductible to him or her. If you decide instead that you are going to own your home, some of those items that were a part of your rent payments will become deductible to you. You wind up being able to deduct the interest you pay on your loan and the property taxes you pay to your local town, county, or borough. In essence, through the tax deduction Uncle Sam is reimbursing you for a portion of the payments that otherwise you would be making even if you were renting, and so that is really where the tax advantage of individual ownership comes in.
THS: Are there any other deductions related to homeownership that people might be less aware of?
BE: Well, when you buy a house, very typically you are going to wind up paying points to your lender. [Banks commonly charge points both to cover the costs of making a loan and in exchange for a lower interest rate. A point is equal to 1 percent of the loan amount.] And those points are also deductible, and that can be a relatively significant portion of what you have to pay to acquire the ownership. Also, from time to time Congress sees fit to provide other incentives to homeownership, such as energy credits, credits for first-time homebuyers, and credits for certain targeted buyers (such as low-income persons). These are often not a part of the “permanent” tax code, meaning they are in the law for only a relatively short period of time. This can making planning difficult, because in my experience, people typically don’t hold off on a home purchase simply in the hope that more favorable tax rules will be enacted.
THS: Have there been any recent changes to the tax code that potentially affect homeowners?
BE: One that is relatively recent, within the last eight years, is [a change] for those folks who perhaps got in trouble financially, for instance, in 2008. There is a notion in the internal revenue code, that, if you end up being forgiven from debt, then that [forgiven debt] counts as income. That has been in the tax law for a long time, but Congress realized that when you are in the kind of economic circumstances we were in following 2008, there may not be a wealth increase associated with debt forgiveness because the value of the residence has gone down (and that is what led the lender to forgive the debt or a portion of it in the first place). So what the tax laws have recently provided is that certain homeowners can have their mortgage debt reduced without having to recognize that [reduction] as income.
Another relatively recent provision that applies through the end of this year  is the residential energy-efficient credit. It could apply to a homebuyer who is purchasing a newly constructed home. Or it could apply to an existing homeowner who makes the necessary types of expenditures.
THS: So, for instance, homeowners who received a mortgage modification after the 2008 financial crisis?
BE: Yes, potentially. It’s not available to everybody. It has income limitations and things like that, as do a lot of otherwise favorable tax provisions.
The purpose of the discussion above is for the reader’s general information only, and such information does not necessarily reflect the opinions of Sorensen & Edwards, P.S. or any of its attorneys or clients. Sorensen & Edwards, P.S. and its attorneys do not, by providing this information, provide legal advice or undertake to legally represent any person using such materials, and the discussion here is not intended to create the attorney-client relationship. The reader should consult his or her own attorney or other qualified adviser concerning the specifics of the reader’s own situation and how the law may apply to that situation.