Last week, I wrote about some of the tax benefits that come with home ownership. Here are more ways to maximize the financial benefits of home ownership.
Home Equity Line of Credit
If the market value of your home is significantly greater than the amount you owe on your home loan, you may be able to take out a home equity line of credit (HELOC). This allows you to invest your cash in something more lucrative than a savings account while still having ready access to cash, should the need arise. You only pay interest on the amount you draw from the line of credit, and you can repay the loan by liquidating other investments as needed.
Second Mortgage
Another way to benefit financially from home ownership if the market value of your home is significantly greater than the amount you owe on your home loan is to take out a second mortgage. You can use the money for whatever expenses you choose: college tuition, vacation, etcetera. If you use the money to do home improvements, the interest on the loan may be tax deductible.
If you use the money from the second mortgage or the line of credit to invest in the stock market (or other investments), the loan becomes an investment loan with its own tax rules and benefits. If you use the money to invest in your business, it becomes a business loan with its own tax rules and benefits.
Let’s say you own your home free and clear. You can take out a mortgage against the value of that property and deposit the funds into your business account. You can then use that money as the down payment on a new office building, to purchase a company vehicle, or to acquire a piece of equipment. Those business expenses are tax deductible—as high as 36 percent for federal tax savings, 9 percent for state tax savings, and 15.5 percent on self-employment tax savings.
Business deductions are usually more advantageous than either personal or investment deductions, so if you can borrow against your home to fund business expenses, that’s a smart financial choice.
You can also do this with car loans, by the way. If you purchase a car with cash, you can then get a loan against the value of the car, sometimes as much as 110 percent of the value of the car. (I still don’t know why banks are willing to do this, but they often are.) The loan on that personal vehicle can be used to fund business expenses.
Another Benefit
If a married couple owns a home together and one of the spouses dies, there are major tax implications. Depending on how title (ownership) is held, you may receive a stepped-up basis for some or all of the property. Basis is the acquisition cost plus improvements minus depreciation. You don’t usually depreciate your owner-occupied residence—and this tax benefit can apply to commercial or other types of real estate.
That means if you bought a house for $100,000 40 years ago and spent $50,000 remodeling, your basis is now $150,000. That house is now worth $900,000. If the married couple sells that house, they will have a capital gain of $750,000 and owe taxes on $250,000 ($750,000 minus the standard $500,000 deduction). If one of the spouses has passed away, tax law automatically increases the basis to the market value at that time, in this case, to $900,000. This means the remaining spouse doesn’t have to pay any capital gains tax if she sells at $1.15 million. ($1.15m – $900,000 = $250,000. Each individual gets a $250,000 exclusion from taxable gain.) These benefits depend entirely on how the title is held. Talk to your tax professional for details.
For obvious reasons, it’s wise to limit your debt. However, if you can use your home to fund responsible investing and spending, that’s a win in my book. Just remember, the tax deductibility of the interest on a loan is not just a function of the security used for the loan (for example, the mortgage); deductibility is related to what the money is used for.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.