Thinking of Buying a Home? Watch Out for the AMT ?Bite.? (Ezine ...

Economists are saying the real estate market may finally be bottoming out.? New construction activity is picking up, as are resales of existing homes.? There remains a significant of foreclosure activity, but to a buyer this is just another opportunity.? While in general the tax advantages of home ownership are well-known and well-publicized, little is actually known about the Alternative Minimum Tax implications of home ownership.? Understanding this can make a significant difference to new homeowners because they may not end up getting the tax benefits that they think they will be receiving.

The costs of home ownership

Along with home ownership comes a mortgage, with monthly payments seemingly going on forever as well as an obligation to pay property taxes.? While a small portion of the monthly mortgage payment will go towards paying done the principal of the loan, the largest part of each payment will be interest.? This interest portion has tax implications, both for the Regular Tax as well as the AMT, as discussed below.

Real estate taxes are annual obligations that must be paid to state and local governments.? Each taxing jurisdiction sets its own payment schedule ? some are due annually while others may be semiannually or quarterly.? One of the things new homeowners may experience is the lending bank requiring that property taxes be escrowed.? In this case, each monthly mortgage payment includes an estimate of 1/12th of the total property taxes due.? The bank then holds these funds in escrow, and it is the bank that makes the actual payments to the taxing jurisdiction.

Mortgage interest

The good news is that interest paid on a mortgage used to acquire a home is fully deductible, both for the AMT as well as the Regular Tax. (There is a $1 million limitation on the debt for this purpose, but we?ll assume this is not a problem for the average reader.)

AMT problems arise, however, when a second mortgage or home equity line of credit is put on the home.? While the interest on these loans similarly is deductible for the Regular Tax (for loans of up to $100,000), the Alternative Minimum Tax limits the deduction to loans the proceeds of which are used to make improvements to the residence.? Thus, for example, if the line of credit is used to buy a new car, that interest is no longer deductible for the AMT.

Real estate taxes

Here is where the real ?bite? is felt from the Alternative Minimum Tax.? Property taxes, while fully deductible for the Regular Tax, are not deductible at all for purposes of the AMT.? This is the reason property taxes, along with state income taxes, are the single largest item affecting the majority of Alternative Minimum Tax payers.? In fact, nearly 95% of everyone stuck in the AMT is affected by this item alone.

Planning opportunities

Is it possible to own a home and not get stuck by the Alternative Minimum Tax?? The answer is yes, depending of course on each individual?s situation.? The key to this, however, is doing just a little planning for the AMT-triggering interest and taxes items.

Planning for interest ? as discussed above, the primary mortgage on the house is not an AMT problem.? If consideration is being given, however, to using the equity in the home for making other purchases such as the car example above, it could make more sense to look to a traditional auto loan instead of a home equity loan.? A simple comparison of the after-tax cost of the interest needs to be made.

Planning for taxes ? the key to minimizing the AMT impact from real estate taxes is to know whether you will be in the Alternative Minimum Tax this year or next year.? If you can pay all or even a part of your real estate taxes in a year you are not in the AMT, you will get a tax benefit from the deduction, which could be a refund of up to 35 percent of the property tax bill.? As an example, if you receive a tax bill in the fall and it is not due until January, you have total discretion to pay it in either year.? If you already are in the AMT this year but do not expect to be until next year, simply wait until January to pay the bill.? Note that if your taxes are escrowed you will need to talk with your banker about the timing of these payments.

Don?t let the joys of home ownership be soured by having the AMT take a surprise ?bite? out of your investment in the home in the form of additional taxes you weren?t anticipating!

aurora borealis gcb mary j blige rush limbaugh rush limbaugh dionne warwick patricia heaton