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Tom Kelly
Tom Kelly
The Real Estate Adviser

March 26, 1999

Tax issues for home owners

By TOM KELLY
The Real Estate Advisor

The significant changes in capital gains tax brought by the Taxpayer Relief Act of 1997 have been a huge help to folks house rich but cash poor. No help, however, was delivered to people who purchased at regional peaks of the housing market and have watched their home's value go downhill ever since.

With the federal income tax filing date just around the corner, there still is no deduction for a capital loss on the sale of your primary residence. This often causes confusion and provokes questions from consumers, but Uncle Sam will not let you show a loss if you sell for an amount less than the purchase price.

Why? The principal residence has always been viewed as a personal asset. The gain on the sale of a principal residence has been taxable as a capital gain but losses have never been allowed. Although the capital gain thresholds have been increased significantly ($500,000 for a couple; $250,000 for a single person) proposals to address capital losses have been defeated.

The confusion surfaced again a few years ago when several parts of the Republicans' "Contract with America" include tax law changes, but the one drawing considerable attention was House Resolution 9, the Jobs Creation and Wage Enhancement Act. A proposal to allow tax deductions for losses on the sale of a principal residence was part of that bill but did not make the cut.

Although home values are rising in most regions of the country, some have been flat. In addition, more than a few potential homebuyers get emotionally carried away when bidding for a home. In some cases -- especially where there are multiple offers -- the offer can exceed the actual fair market value. If the market flattens, it could years to recover an over-bid mistake. Those buyers often must move again before the market catches up.

A tax attorney on the staff of the House of Representatives' Ways and Means Committee said the proposal stemmed from complaints from homeowners in the Sun Belt and New England who said they were left with huge losses and no federal tax help when home values plunged during the past decade.

"The problem wasn't very common until about 10 years ago because people just didn't sustain a lot of losses from home sales," the attorney said. "But when the declining oil industry in Texas really shook the housing market around Houston, people began to question why they had to pay tax on any gain but got no help from a loss. New England had its share of declining values, too, so I think this proposal was in response to those types of examples."

Another hotly debated issue this time of year is the deductibility of loan fees. You can deduct the loan fees ("points") paid to buy or improve your main home in the year of purchase. You cannot deduct these fees in the year you refinanced if you refinanced only to obtain a lower interest rate on your loan.

The term "points" once used to describe only prepaid interest on government loans, now is used to describe charges paid by an owner to secure any mortgage. These points can be loan origination fees or prepaid interest to "buy down" an interest rate. To be deductible, these charges -- or points -- must represent interest paid for the use of money and must be paid "before the time for which it represents a charge for the use of the money."

According to the Internal Revenue Service, most points paid when you are refinancing an existing mortgage must be written off over the life of the new loan. However, If you sold a home in 1998, you can still deduct several items including title insurance costs and excise tax. For guidance on closing costs, the best source may be the settlement sheet from the original loan.



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