Genius Tax Tips for Millennial Homebuyers

February 10, 2020 by
Updated on February 10th, 2020
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Of the many confusing experiences to navigate when saving for a home, buying a home, or selling a home, understanding the tax implications is certainly near the top. If you’re entering the housing market for the first time or thinking of starting to save for a home through various investments, being educated on the tax landscape is crucial for your success. To help take some of the weight off your shoulders, we’ve scanned the interwebs in search of tax experts and asked them to weigh in with their best tips for millennial homebuyers. Whether you’re in Austin or Philadelphia, read on to demystify all those payments to good ol’ Uncle Sam!

Of the many confusing experiences to navigate when saving for a home, buying a home, or selling a home, understanding the tax implications is certainly near the top. If you’re entering the housing market for the first time or thinking of starting to save for a home through various investments, being educated on the tax landscape is crucial for your success. To help take some of the weight off your shoulders, we’ve scanned the interwebs in search of tax experts and asked them to weigh in with their best tips for millennial homebuyers. Whether you’re in Austin or Philadelphia, read on to demystify all those payments to good ol’ Uncle Sam!

Regarding 2019 tax filing, be sure to pay your personal residence property taxes before year-end. Since the maximum itemized tax deduction is now $10,000 through 2025, barring any change in tax law, it generally no longer makes sense doubling up on paying two years of personal residence property taxes at once. Of course, since property taxes on rentals or other business property is not subject to the $10K limit, it makes sense paying them before year-end to take a current-year deduction and reduce taxes now vs. waiting until 2020 to take the business property tax deduction if you decide to pay your property taxes in January 2020. Iain A. Howe, CPA, Howe & Romero, CPAs, PLLC:

Don’t let a tax decision override an investment decision.  I’ve seen people get so focused on the tax implications of a financial decision that it clouds their thinking.  It’s important to realize that in most cases, tax implications generally carry a far lower weight than being in a good area and getting the property that suits your needs. Brannon Poe, CPA, Poe Group Advisors:

Tips for Landlords:

  • You can depreciate your residential property over 27.5 years if you rent it out. The depreciation can be a great deduction on your Schedule E.
  • Mortgage interest and real estate tax are deductible. However, any expenses you pay to get a mortgage are not deductible. Instead, these expenses will increase your basis in the property.
  • If you are a real estate agent, you can use the loss from rental property to offset your ordinary income.
  • You can deduct the cost of repairs in full if the amount is not large. You will need to capitalize on the cost and depreciate it over the useful life if the amount is significant.
  • Setting up an LLC for the rental property can limit your personal liability and keep your business & personal expenses separate.
  • Income from related -party rentals may be eligible for the 20% Qualified Business Income deductions.

George Dimov, CPA, Dimov Tax Specialists

The 2020 standard deduction amount is $12,400 for single filers and $24,800 for taxpayers married filing jointly.  If itemized deductions (the most common being property taxes, state and local taxes, mortgage interest, and charitable contributions) exceed the standard deduction, there is a further $10,000 limitation on total combined state and local taxes (including property tax) that may make it difficult to exceed the standard deduction.  In planning for the purchase of a personal residence, be mindful of these two hurdles that may limit tax savings on mortgage interest and property taxes paid. Timothy Nelson, CPA, Tax Senior Manager, Delap

Startup Expenses: Any expenses you make preparing your home for rent are considered startup expenses and they are not automatically deductible. In the first year you’re in business, you can deduct $5,000 in startup expenses, but everything after that must be deducted over the course of 15 years. Where you can avoid losing money is getting the home listed (i.e. starting the business), since the rental property does not need to have a tenant to be considered “ready to rent.”

Entity Selection: Make sure you don’t choose a corporation (either S or C Corp) for your real estate investment as it can lead to you being taxed twice. The best entity selection for real estate investment properties is LLC or LLP. These provide you with limited liability (so you don’t need to worry about being personally sued as with a partnership or sole proprietorship) and provide the maximum flexibility and tax savings. John Huddleston, Founder, Huddleston Tax CPAs

New tax laws affecting the deductibility of mortgage interest: Under the Act, starting in 2018, the limit on qualifying acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately).  And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt no matter when the home equity debt was incurred. Accordingly, if you are considering incurring home equity debt in the future, you should take this factor into consideration. Evelyn Cook, CPA, Cook CPA Group

When comparing the cost of buying a home to renting, don’t overlook the cost of homeowner association dues and insurance including flood and earthquake (where applicable), and also remember there are caps on both the itemized deduction for mortgage interest and property taxes. Under the recent tax reform, home mortgage interest is limited to the interest on $750,000 of home acquisition debt and you can only deduct $10,000 of taxes which encompasses all taxes including state and local. Don’t forget to consider that these deductions only benefit you to the extent they exceed the standard deduction: for 2019, this is $24,800 for married couples, $12,400 for single taxpayers and those filing as married separate, and $18,350 for those filing as head of household. Lee Reams Sr. BSME, EA, Chief Technical Officer, TaxBuzz

Most of the millennial homebuyers will not be in houses large enough to benefit from itemizing their deductions due to the increase in the standard deduction with the new tax law passed last year. Therefore my tip for first-time homebuyers would be to keep track of their basis in their property.

A lot of first-time homebuyers want to buy a ‘fixer-upper’ that they live in and improve over time to increase the value of their property. This is because it’s generally a starter home, not a forever home, and since houses cost a lot of money, it is considered an investment. Millennials should keep their receipts associated with any home improvements because these costs are added to the tax basis of the property. When the house is sold, the assumption that the IRS makes is proceeds minus cost basis (because these are reportable numbers) in order to determine the gain, but actually any money spent improving the property will increase that basis and reduce the gain on the property. The receipts are proof if the figure is ever scrutinized. This is especially important if the homeowner sells before they’ve lived in the house for two years, since they would not qualify for the primary residence exclusion. Michael Lotito, CPA, Lotito & Lazzara, PC

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Ryan is on the marketing team at Redfin and loves writing data-driven articles about all things real estate. Ryan's dream home would be a Cape Cod-style house near the ocean and the mountains.

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