Home Loopholes so Your Home Pays You (Part 2)

Change the way you view your home. This simple shift in perspective will allow you to see it not only as a roof over your head but as a key financial asset that will play a critical role in your wealth building plan. The following is adapted from “Loopholes of the Rich” by Diane Kennedy, CPA.

Live in Your Property for More Than Two Years

Do you need to move to take advantage of the value of your home? The answer is “no.” You can simply refinance the property to take the value out of the property. If the current market interest rates are higher than your existing loan, consider getting a home equity loan instead.

Once your gain (sale price minus basis minus cost of sale) approaches $250,000 if you’re single or $500,000 if you’re married, it’s time to sell and buy the next property. If you’re in a midrange-priced home in an average appreciating area, it’s likely that you won’t hit that maximum gain amount for five or more years. As with most financial decisions—do the math!

Renting Rooms

I have clients who have bought large, fixer-upper homes at huge discounts through preforeclosure processes. Often they have a much bigger house than they want or need, and some relish the idea of a congenial roommate.

If you rent out part of your home, you’ve created a business opportunity for yourself just the same as if you had a business operating out of it. The difference is that this is not a home office. In this particular case, you would have a rental property that is reported on Schedule E. That means that you can now deduct the pro rata portion of home-related expenses against the rental income as well as the depreciation for the space. And when you sell your principal residence, you can exclude the gain on the pro rata portion of the home.

Of course, that begs the question: What if you rent out the main portion of the home, maintaining just a small room as your personal residence in which you reside one month out of 12? As long as you own the home for two years, you’ve got a full tax-free gain exclusion.

Defense for High Income Loss of Deductions

One of the worst surprises that can happen at tax time is when a taxpayer discovers that his bonus or raise meant he couldn’t take the tax deductions he used to get!
Certain itemized deductions are not subject to this limitation: the deduction for medical expenses, the deduction for investment interest, the deduction for casualty or theft losses, and the deduction for gambling losses.

A strategy to avoid this loss of deductions is to look for ways to move the mortgage interest deduction off the Schedule A. One of the best ways to do that is through the use of the home office deduction. The home office deduction allows you to deduct a pro rata portion of the mortgage interest and property tax on a separate schedule (depending on what type of business entity you are using for your business).

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