No doubt home ownership is great - not so great are the taxes. But, we have to pay them. What we don't have to do as a homeowner is fall into a couple of the ownership traps or misconceptions out there about things you should do to protect yourself and your family when it comes to future taxes associated with owning a home.
Selling My Home For A Loss Is Ok - I Can Write It Off
Selling your home for a loss is not ok, but it does happen, especially in today's housing environment. How you handle your losses with your taxes at the end of the year could spell trouble for you in the future. The losses you incur by selling your home short of what you owe, or less than what it is really worth and trying to claim the undersell as a loss on your taxes is a no no.
Your Home Is Considered Personal Property
With your home considered personal property by the IRS - Internal Revenue Service - losses on your home are not tax deductible. If you need more explanation than this you can think about it this way. Do you remember the old Sony TV with the turn dial? If you decided to give yours away to someone who needed a TV you couldn't write off the price that you paid for the TV, nor could you write off any lesser amount. Because it is personal property you are not allowed to writeoff losses to personal property.
Unfortunately, the reverse of this does cost you money. If your home goes up in value and you sell it and make money with it, you will have capital gains tax to worry about. It sucks, but that is the way the IRS rules are written. Fortunately, the IRS has provided some exemptions for home owners who have owned and lived in their homes for at least the prior last 2 of 5 years. If you are considering selling your home you should contact your local tax adviser for specific advice for your situation.
In this myth, you need to consider whether your child is able to establish your home as a primary residence or not and this has to be within 2 of 5 prior years prior to the sale of the home. If they can't make it their primary residence, then your child's ownership will be defacto to investment property and lose the benefit of the ownership exemption that owners can get under certain conditions when they sell their home.
Putting My Child or Children On The Title Of My Home For Tax And Estate Planning
I cannot and will not go into detail too much here as this is a conversation that should definitely had with your tax adviser. But, if you are trying to avoid probate, give your kid one less thing to worry about later, or get your home out of your name and into theirs to minimize either party's tax exposure you should get some professional advice before you do anything. You may have some other reasons for wanting to put your property in your child's name.
It's not a bad idea to do this, but you want to do it for the right reasons and the right way. Also, it might not be an appropriate thing to do which is why you really want to do some estate and tax planning consultations first before you make any changes to your home's ownership. Two terms to remember here are your property's carry-over basis and joint tenancy for this particular myth.
For further myths please see: Home Ownership And Taxes - Two Myths To Avoid
