Summary:
Maximize real estate tax benefits in Northern Virginia by leveraging exemptions and deductions available to homeowners and investors. Key strategies include capital gains exclusions, mortgage interest deductions, and depreciation benefits for investment properties.
Main Points:
- The Section 121 exclusion allows for up to $500,000 in tax-free profit on home sales.
- Mortgage interest and property taxes are deductible for homeowners.
- Investment properties offer various deductions and depreciation benefits.
- Consult local real estate experts for personalized guidance.
Real estate is a high-value asset. That’s true nationwide and especially in hot markets like Northern Virginia.
There’s no way around the cost of real estate itself. Homes regularly have six-figure and seven-figure price tags, and that’s only part of the overall cost of real estate. Taxes, insurance, and many other needs must be addressed as well.
Thankfully, there are ways to reduce that overall cost. Various real estate tax benefits can be utilized by both buyers and sellers. While not every benefit applies to every real estate transaction, many are broadly applicable
Let’s take a closer look at real estate tax advantages in Northern Virginia.
The Largest Real Estate Tax Benefit When Selling a Home
In the big picture, most well-maintained homes tend to appreciate in value over time. That’s great news when it’s time to sell your primary residence and move into a new one. However, there’s also a significant tax burden that can come into play — and a widely available credit that helps many homeowners avoid high taxes.
When you sell a home and earn a profit (i.e., the increase from the purchase price to the sale price, less certain home purchase and home improvement costs), you earn money that is taxed as a capital gain.
For some homeowners, especially those who’ve owned their primary residence for a while and have seen real estate prices in their area increase significantly, that could mean having to pay taxes on hundreds of thousands of dollars in profit.
The good news is that an IRS exemption called the Section 121 exclusion allows for a major tax deduction on homes. For qualifying individuals filing their taxes by themselves, $250,000 in home-sale profit can be excluded from income. For couples filing jointly, the exclusion limit is $500,000.
Even better news: The qualifications for this exemption are very broad and generally easy to meet. As Investopedia explains, qualifying for this exemption requires:
- The property in question is a primary residence.
- The owner, or both owners for a couple, have lived in the home as a primary residence for two out of the past five years. The time does not need to be consecutive.
- The Section 121 exclusion has not been used for another home sale within the past two years.
Real Estate Tax Benefits for Homeowners
Owning a home often means paying a mortgage, which includes payment on the loan’s principal as well as its interest. Homeowners can deduct the cost of interest (although not principal) from their taxes on primary residences and second homes.
As LendingTree explains, individuals and married couples can deduct the first $750,000 of mortgage interest, while couples filing separately can each deduct $375,000.
Similarly, there are many instances when homeowners who paid for mortgage points can deduct the cost of those points from their taxes. The IRS offers more in-depth guidance on this topic.
Finally, the Tax Foundation notes that a key real estate tax benefit is the deduction of state and local taxes (SALT) related to real estate from federal taxes. With an itemized federal return, individuals and couples can deduct up to $10,000 in state and local property taxes (as well as income taxes and sales taxes) from their federal tax returns.
Real Estate Investment Tax Benefits
Rental and investment properties can yield some significant tax advantages. As Rocket Mortgage explains, one of the most common investment property tax benefits is the wide range of available deductions.
Property taxes, property insurance, building maintenance costs, property management costs, and many other expenses related to investing in real estate can be written off. So can expenses related to running the business that manages your property or properties, including but not limited to equipment and office space.
Annual depreciation is another key real estate tax benefit. If you rent a property to others, you can claim part of the building’s value as a deduction on your taxes each year.
As SmartAsset explains, depreciation is calculated by dividing the value of the structure itself (and not the land it sits on) across a period of 27.5 years for residential properties and 39 years for commercial properties. This adds up to a significant tax break for many investment property owners.
Expert Support for Buyers and Sellers in NOVA
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