What the IRS giveth, it often taketh away.

So, we know that if we are single and sell our primary residence, the first $ 250K of gains on that sale are deductible. Remember, those gains need to be properly determined.

Most of us who’ve lived in our houses for 25 years or so have invested money in that house. A new roof (mine was $30K), a new kitchen and patio ($ 149,240), a new air conditioning and boiler system ($ 9500), and rebuilding several bedrooms when I moved in ($32,100)- those kinds of things.  But, not the painting of the house- that is considered a normal repair event.

Those totals of $ 220840 (in my example)- plus $ 6000 in landscaping are added to the purchase price of my house. So, instead of paying $ 330K, I really spend about $ 557K on that house. Add the $ 250K of sheltered gains means that if I sell the house- without a realtor- for $ 807K, I don’t the IRS a penny. And, since most of us use a realtor, who gets about 6% of the sale price, that means a sale of $860K will keep me out of the crosshairs of the tax man.

Now, if I were married, the amount of  capital gains that are sheltered is $ 500K, not $ 250K. That’s good for those of us who bought our houses before the boom of the 90s and 00s. And, that $ 500K only is deductible, if we are still married when we sell the house.

But, there’s another tax issue. One that applies to many of the folks who live in the DC, NY, and California areas. Where we buy houses that would cost $ 250K or $ 300K in Tuscaloosa (AL), but ring up tabs of $ 1.4KK in these parts of the US. So, the mortgage bill is pretty steep.

If we are married, then we can deduct the interest on our mortgages, as long as our mortgage does not exceed $ 1 million. Then (although the IRS is considering closing this window), there’s also deductibility for a HELOC (home equity line of credit) of up to $ 100K. Not one penny more. And, if we file separately, those values we can itemize on Schedule A are each limited to $500K and $50K, respectively.

Now, that is a lot of debt for one home, but many of us have our home- and a vacation home. Those two debt totals are what we are able to deduct.

But, consider this. If we were cohabiting and NOT married, then we would be able to deduct the interest on our $ 1 KK mortgage. And, our cohabitant could deduct her own payments on her $ 1KK mortgage. That means the cohabiting couple can purchase and finance a more expensive residence that the married couple can afford. (OK. When we are talking about millions in debt, affordability is clearly NOT the right verbiage.

Just letting you know what you can and cannot do.

(Of course, folks could rent out their second house, which means the mortgage debt on that property is no longer listed on Schedule A, but found on Schedule E. Yet another way to “deduct” mortgages that that exceed $ 1KK, despite the IRS rules.)

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