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Ensuring your taxes are done correctly can be challenging all on its own. Including the purchase or sale of a home adds another layer of complexity to the task. To give you a better view of the bigger picture, let’s cover how real estate transactions affect both buyers’ and sellers’ taxes:
Single or Married?
If you are single, it is straightforward. The loan is in your name and all expenses are paid out of your bank account. The single individual holds all the liabilities and benefits of purchasing a real estate including the tax benefits.
If you are married, it is a bit of a different story. There are a few questions that comes up like was the house purchased before or during your marriage? Was there an agreement in place when you got married? For simplification lets just assume, for this article, that it is a married couple that bought a house during their marriage.
Fun Fact: California is a community property state, which means if you buy a house during your marriage the house gets split 50/50.
Now lets get started.
Dealing With Capital Gains
With respect to real estate, when you sell your home, chances are you’re coming out with some profit from the transaction, and that does get considered income in the form of capital gains.
Capital gains are taxed, but there are stipulations on how much you must earn within a year to be required to pay taxes on them. Someone filing as single selling their primary residence is exempt from the first $250,000 from their home sale. For a married couple filing jointly, this capital gains tax exemption is doubled to $500,000.
As you can see, this is one area where you and your spouse’s tax filing statuses truly matter, so consider all the details carefully before adjusting what seems like a solid plan.
Now, if you own multiple properties you may be asking yourself how you determine which one is your primary residence. The easiest way this is figured out is by using what is called the 2-in-5-year rule. This rule states that the home in which you spend a minimum of 24 months living in as your primary residence within a five-year period is legally considered your primary residence for tax purposes.
After all of this explanation, the final critical bit to remember is that this capital gains tax exemption can only be used once every two years, so it may not be beneficial if you’re frequently buying and selling real estate.
Property Taxes
It should come as no surprise that upon buying real estate you then become the individual responsible for that home’s property taxes. You can expect a tax bill to be mailed to you twice a year, with the total payment split in half to eliminate the need to pay your property taxes as one lump sum.
Factoring in a property’s latest tax bill, along with your utilities, services, and mortgage payment, is key to budgeting effectively into the future years. If you have taken out a home loan from a mortgage lender who puts part of your mortgage payment into an escrow account, it’s likely that you will need to send your first tax bill to the lender.
They will need this first tax bill for their records along with dispensing the payment from your escrow account. Any future tax bills are likely to be handled directly by them with little to no intervention on your part.
If you decide to handle the property tax bill yourself for your San Francisco property here are some important dates.
July – Assessor mails taxpayers a Notice of Assessed Value
November 1 – Should have received a property tax bill
December 10 – Deadline for payment of first installment
April 10 – Deadline for payment of second installment.
Fun Fact: Living in California has a benefit of property taxes being limited to no more than 1 percent increase every year. For example most other states don’t have the landmark Prop 13 so the assessor could send you a letter and say your property has increased by over 15%. This happened in 2021 where home prices increased by 16.9%, which is 16 times more money than would have been paid out if it was 1%!
Mortgage Interest
Don’t confuse mortgage interest for monthly payment. Mortgage interest is the amount that is paid to the bank for borrowing the money. So interest is only a portion of your monthly payment, not 100%.
For example, a homeowners buys a 1 million dollar house and puts 20% down. They find a lender to finance the deal at 6% interest rate for 30 years fixed. This means that after 30 years the homeowner would have paid about 1.7 million to the bank of which $926,000 was interest.
This means $926,000 could be deducted as interest and the $800,000 loan cannot be deducted for interest. There is a big but and that is with the current tax laws homeowners can only deduct $750,000 worth of interest. The good news is that it takes about 20 years to pay about $750,000 worth of interest and tax laws could change by then.
What is Not Tax Deductible
Some people ask can I deduct this or that? Here is a short but not comprehensive list of things that cannot be tax deducted.
- Fire, and Earthquake Insurance
- Homeowners Insurance
- Depreciation
- PG&E and Water
- Down Payment
- Home Repairs
- Home Appraisal
- Monthly Principal Payment
Understanding Real Estate and Your Taxes
If you’re looking to buy or sell real estate to take advantage of any tax breaks you may get, contact me today at 415-830-1423!
Disclaimer: Information provided on is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances. I do not offer financial advice, advisory or brokerage services.
