Hi - I am actively looking to buy a home in CA.What are the tax strategies I should be aware of before buying my home ? Example - setting up a LLC/ Trust , mortgage in my name v/s for me and my spouse etcLooking forward to the inputs
WWhat are the tax strategies I should be aware of before buying my home ? Example - setting up a LLC/ Trust , mortgage in my name v/s for me and my spouse etcWell, titling the house in an LLC generally doesn't have any tax implications, if you and your spouse are the only members of the LLC. The LLC tax impacts will just flow through to your tax return. However, if you want to do this, you need to be sure your mortgage lender is aware of it and has approved that you title the house in an LLC.If you put the house in a trust, tax implications would depend upon the terms of the trust. Again, your mortgage lender would need to be aware of and approve putting the title into a trust. Having the mortgage in only your name doesn't really matter from a tax perspective if you're MFJ. That said - you may find it more difficult to qualify for a mortgage if your spouse has income that won't be counted. On the other hand, if your spouse has poor credit, you may find it easier to qualify for a mortgage without including your spouse. In either case, your spouse will likely have to sign something subordinating their claim on the home to the bank's claim.The one general thing that you didn't ask about is whether buying a home will even bring you very much of a tax benefit, at least on Federal taxes. (I don't know the specifics of CA state taxes, so I can't comment on that.) From a Federal perspective, for MFJ, you will need to have over $25,100 in deductible expenses in 2021 to overcome the hurdle of the standard deduction. However, interest is only deductible on up to $750k in mortgage debt. If you have, say, a 3% interest rate, even if you had a mortgage with a principal balance more than $750k, the deductible interest it would generate would only be $22.5k a year because of the limit on the deductible interest. Once your principal balance dropped below $750k, the deductible interest would decrease each year. With the SALT rule limiting total deductible state and local taxes to $10k, that means that, at most, the highest your additional deduction would be is $7.4k, unless you have other deductions. Even at the highest 35% bracket, that would save less than $2,590 in Federal taxes. If your mortgage balance and/or your interest rate is less, it could be that paying mortgage interest won't actually save you anything - many people who used to itemize deductions no longer do because the current standard deduction is more than their itemized deductions.AJ
Is this home for you to live in, or to rent to others?--Peter
Yeah I don’t see the point of a LLC for tax reasons, just for lawsuit protection if it’s a rental.If you get a lawyer to set up a proper LLC which I recommend over something you found free on the internet that costs money.Also taking out a mortgage via a LLC rather than as owner occupied will result in needing a larger downpayment (30%), a higher interest rate on the loan (plus 1%) and needing to file a separate tax return every year (add possible CPA costs).It’s not a magical tax loophole.Disclaimer: I own two rental properties and they are in an LLC.
Oh yeah and double your property taxes and bump up homeowners insurance if it’s not owner occupied…
Oh yeah and double your property taxes and bump up homeowners insurance if it’s not owner occupied…Since the OP specified that they are purchasing in CA, I'm pretty sure that the property taxes will not be double, at least not initially. California's Prop 13 requires that taxes be assessed based on the purchase value. There is a Homeowner's property exemption in CA that allows you to knock $7k off the value of the house, but given that median house price in CA is over $800k, that means that the owner-occupied home will pay over 99% of the property taxes of a non-owner-occupied home. Prop 13 also limits tax increases to 2% a year, although I'm not sure if that only applies to owner-occupied homes or if it also applies to investor properties. Even if the 2% limit on increases is only applicable to owner-occupied properties, it would likely still take several years for the property taxes on an investment property to be double those of a comparable owner-occupied property in California.At least in my experience, landlord insurance is maybe 10% more expensive than homeowner's insurance, although I will point out that you don't get nearly as much personal property coverage. But since you're not living there, unless you're renting the property out as furnished, presumably, you wouldn't have nearly as much personal property that would be at risk. On the other hand, you do get income replacement if the building becomes unlivable because of a covered incident. (Note: eviction moratoriums due to a pandemic are not considered a covered incident, at least by my carrier.)AJ
although I will point out that you don't get nearly as much personal property coverage. But since you're not living there, unless you're renting the property out as furnished, presumably, you wouldn't have nearly as much personal property that would be at risk. We had a fire in our rental property. It was caused by a damaged power strip owned by the tenats. Our Landlord policy considered window treatments and non-built in appliances personal property. They were covered at a lower rate. Overall, a minimal amount of the loss given the structure was more than a 90% loss.
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