Posted in: Ask a Lawyer, Homeowner tips, Buying a home, First time homebuyer tips

Ask an Edina Realty Lawyer: What are the tax implications of homeownership?

Tax implications of homeownership

Homeownership can be complicated, but we also think it's one of the most rewarding ventures out there. In our new series, Ask an Edina Realty Lawyer, we are hoping to demystify some of the trickier aspects of buying, selling and owning a home. In this edition, one of our lawyers recaps what potential buyers should know about homeownership and taxes. Please note: This is not intended to provide legal advice.

Dear Edina Realty Legal,

I am currently renting, but I'm thinking about buying a house. Are there any tax issues I should be considering?

Edina Realty Legal:

There are a few different tax implications of owning a home. And you might be surprised to learn that they can be positive. The three main homeowner tax issues you should understand are:

  1. Property taxes
  2. Income tax benefits of homeownership
  3. Capital gains taxes

Let's look at each of these issues separately.

Property Taxes

As a homeowner, you will be required to pay an annual tax on your home. If you are a renter, you're already paying your landlord's property taxes; it's just included in your monthly rental payment. Here are a couple of things to know about property taxes:

  • The amount of property tax you pay is based on the area in which you live (how much money the local government needs) and the value of your home
  • In Minnesota, the local tax assessor determines the value of your home via mass appraisal
  • If you believe that the assessor's value is incorrect, you can challenge it, sometimes by simply calling or visiting the assessor

To challenge your assessed value, you'll want to have evidence to back up your claim. Examples include a recent appraisal or a list of recently sold, similar homes in your area.

Income Tax Benefits

Homeownership has many benefits and some of the primary financial benefits come at tax time. Income tax benefits of homeownership include the ability to deduct mortgage interest payments and property tax payments.

Plus, if you paid "mortgage points" when buying the home in order to reduce your interest rate, those costs may be deductible as well.

Capital Gains Taxes

Almost every item you own, including your car and television, is a capital asset. But your home is one of the few capital assets that actually tends to increase in value over time — which is great in that it helps build equity. As a general rule, when you sell a capital asset that has increased in value, you need to pay what are called capital gains taxes.

When it comes to selling a home, however, most homeowners qualify for an exclusion of up to $250,000 of the gain. If you're filing jointly, this exclusion rises to $500,000. This means that when your home rises in value you can — up to a certain point — reap benefits without being penalized at tax time.

The Edina Realty Legal Department serves as in-house counsel for Edina Realty and does not represent private clients. The insights included here are not intended to provide legal advice.

Join over {{'43232' | number}} subscribers

Status Definitions

For sale: Properties which are available for showings and purchase

Active contingent: Properties which are available for showing but are under contract with another buyer

Pending: Properties which are under contract with a buyer and are no longer available for showings

Sold: Properties on which the sale has closed.

Coming soon: Properties which will be on the market soon and are not available for showings.

Contingent and Pending statuses may not be available for all listings