​Whether you're an owner now or expect to be one in the future, it is important to be familiar with the federal tax laws that affect homeownership.  Since personal income tax was enacted in 1913 with the 16th amendment, homes have had preferential treatment.

The mortgage interest deduction is based on up to $750,000 of acquisition debt used to buy, build or improve a principal residence.  In addition to the interest, the property taxes are deductible, limited to the new $10,000 limit on the aggregate of state and local taxes (SALT).  The taxpayer may also deduct interest and property taxes subject to limits on a second home.

Homeowners can decide each year whether to take itemized personal deductions or the allowable standard deduction which was significantly increased under the Tax Cuts and Jobs Act of 2017.

​Single taxpayers may exclude up to $250,000 of capital gain on the sale of their home and up to $500,000 if married filing jointly.  They must have owned and lived in the home for at least two of the last five years.  For gains more than these amounts, a lower, long-term capital gains rate is paid rather than one's ordinary income tax rate.

Capital improvements made to a home will increase the basis and lower the gain.  Homeowners are probably familiar that large dollar expenses like roofs, appliances or major remodeling are capital improvements.  However, many lower dollar items may also be considered improvements if they materially add value or extend the life of the property or adapts a portion of the home to a new use. 

Homeowners are urged to keep records of money they spend on the home that they own over the years so that their tax professional can decide at the time of sale what they must report to IRS.

You can download a helpful Homeowners Tax Guide that explains in more detail and includes a worksheet to keep track of the basis of your home and capital improvements.

If you're at an age where you need to be taking Required Minimum Distributions (age 70.5) from your IRA, a qualified charitable contribution and some planning may allow you to lower your overall tax liability.

Let's say that a couple's 2019 itemized deductions include $8,000 in property taxes, $4,400 in interest and $20,000 in charitable contributions.  That would total $32,400 which exceeds the 2019 $25,300 standard deduction for married couples, 65 years of age or older, filing jointly. 

Their required minimum distribution from their IRA is $40,000 which will be taxed at ordinary income.  If this couple is in the 24% tax bracket, the tax liability would be $9,600.

Alternatively, if they made the $20,000 in charitable contributions from their IRA as a Qualified Charitable Contribution, it would not be taxable in the withdrawal.  The balance of the RMD of $20,000 would be taxable at 24% which would have a tax liability of $4,800.

Their $32,400 worth of itemized deductions would be reduced by the $20,000 because it was paid from the IRA which makes their itemized deductions $12,400.  The $25,300 standard deduction would benefit them more by an amount of $12,900 increased deductions.  At 24%, this would reduce their liability by $3,096.

In the first instance, they would owe $9,600 in taxes due to the $40,000 RMD from their IRA.  In the second example, because of the increased amount by taking the standard deduction, the net tax liability would be $1,704 ($9,600 - $4,800 - $3,096 = $1,704).

This example shows how shifting contributions to a Qualified Charitable Contribution will get the same amount to the charity but lower the Required Minimum Distribution that must be recognized as ordinary income.  The shifting also gives the taxpayers the advantage of a higher amount of the standard deduction than the itemized deduction.

As always, before taking action, you should get advice from your tax professional on how this strategy may impact you.  There is information available on www.IRS.com for IRS Required Minimum Distribution FAQs and Qualified Charitable Distributions.