Tax benefits to owner occupancy in California?

5 Replies

My business partner and I are evaluating the possibility of purchasing the home that one of us is renting, due to the owner needing cash.

Can anyone provide a pointer/advice on the tax benefits of owner occupancy for a single family home in California? (Especially any potential changes due to recent tax law revisions...)

@Ronald Hayden I am not a tax professional, I am a realtor. You should verify everything I say with a tax professional for your particular tax situation.

In general the benefits are:

1. Interest on the loan up to $750,000 is tax deductible. It was previously up to a million dollar loan.

2. You can deduct up to $10,000 from your state income and property tax combined on your Federal Taxes. Previously all of the taxes were deductible.

3. If you both live in the home for 2 years out of 5 you would get a $250,000 capital gains exclusion each. No change from previously.

If you buy the house and use it as rental than all of the mortgage interest and all of the property tax are considered expenses and are deductible. However, the interest rate on the loan would be higher.

When you sell it you could do a 1031 exchange and defer taxes on all of the gain that is reinvested in another property.

@Ronald Hayden

Some things to be wary about - You can likely get a discount on the market value if he needs cash(is he a distressed seller?).

The CA property taxes might reset to take it on current market value since CA property taxes get reset on sale.

Marcy Moyer hit on all the major tax points.

that 250 doubles if you're married....

Thanks all — very helpful!

Our accountant mentioned that there could be an impact based on whether it’s evaluated as an investment property?

Originally posted by @Ronald Hayden :

Thanks all — very helpful!

Our accountant mentioned that there could be an impact based on whether it’s evaluated as an investment property?

 you won't get the tax exemption if it's a investment property (ie you're looking to flip), but you would if you were planning on making it your primary residence and lived in it for 2+ years...

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.