Hello lisjtochi,
Thank you for your question.
Your primary residence will be in Chicago if you live and work there.
You will not be able to count the residence in California as your
primary residence for purposes of income tax, because it is not your
primary residence. As far as I know, Illinois has a better tax
climate anyway so this is in your favor. You will be able to deduct
the mortgage interest, and after three years you will be able to sell
it and avoid capital gains tax to a certain extent. I will show you
how.
First, the mortgage interest will be deductible. Your house does not
have to be your primary home in order to qualify for the deduction.
If, however, you rent out the house while you're gone and never spend
time in it, you won't be able to deduct mortgage interest but can
treat it as a rental property and take the deductions inherent in that
classification. (And if the property is a total rental property you
can't take the capital gains tax break I detail later.)
Bankrate-- Tax Deductions
http://www.bankrate.com/brm/itax/news/20030207a2.asp
"What if your real estate circumstances are a bit brighter? Say, for
instance, you're able to swing a vacation home on the lake. You're in
tax luck. Mortgage interest on second homes is fully deductible... You
can even rent out your second property for part of the year and still
take full advantage of the mortgage interest deduction as long as you
also spend some time there.
But be careful. If you don't vacation at least 14 days at your second
property, or more than 10 percent of the number of days that you do
rent it out (whichever is longer), the IRS could consider the place a
residential rental property and axe your interest deduction."
At the end of three years, you should be able to sell your house in
California and benefit from the capital gains tax breaks up to a
certain point.
Bankrate-- Tax Breaks
http://www.bankrate.com/brm/news/real-estate/20041018a1.asp
"When you sell your primary residence, you can make up to $250,000 in
profit if you're a single owner, twice that if you're married, and not
owe any capital gains taxes."
For this tax break, you only have to have lived in the house as your
primary residence for two of the five years prior to the sale. As long
as you've already lived in the house for two years, in three years you
will meet this qualification even without it being your primary
residence.
Finally, your primary residence is classified as where you live, where
you work, where you get your mail, have your bank accounts... where
you actually physically are. Since you will be in Illinois, you will
be liable for Illinois income tax, not California (unless some of it
is made in California at any point in the year).
Search terms:
primary residence taxation
If you need any additional clarification, let me know and I'll be glad to help.
--keystroke-ga |
Request for Answer Clarification by
lisjtochi-ga
on
31 Oct 2006 16:09 PST
Hi keystroke,
Thanks for the reply.
Here is my situation. I am married with a child. I am considering
moving Chicago soon. I would like to rent an apartment there first at
Chicago. I will not rent it out until June 2007. Before then my wife
and I will also fly in and out between San Jose and Chicago. Around
mid 2007, I will convert the CA home to a rental property. I have no
plan to sell it and I have been living in the CA house for two years
already.
From your answer, if I rent an apartment in Chicago, I will treat the
Chicago place as the primary residence. Since I convert the CA house
to a rental in the middle of the year, can I deduct mortgage interest
and property tax? I read from IRS publication 527, mortgage interest
can be deducted as expense. Can property tax be treated as expense?
Since the conversion happened in the middle of next year, should I
split the interest half to itemized scheduke A, and the other half to
the rental expense?
Many thanks for the further reply.
If I rent it out, I think I can still deduct mortgage interest
|
Clarification of Answer by
keystroke-ga
on
15 Nov 2006 06:52 PST
Hello lisjtochi,
I'm sorry for the delay in answering your clarifications. The email
notification system isn't working and so Researchers have to go back
and find clarifications manually which can lead to a bit of a delay.
Thanks for understanding :)
Yes, because you are only converting it in the middle of the year, you
can deduct mortgage interest and property taxes, if you live in the
house for 14 days out of the year. If you meet the 14-day live-in
requirement, the house does not qualify solely as a rental property
and you can take the deductions.
Bankrate-- Tax Breaks
http://www.bankrate.com/brm/news/real-estate/20041018a1.asp
"But be careful. If you don't vacation at least 14 days at your second
property, or more than 10 percent of the number of days that you do
rent it out (whichever is longer), the IRS could consider the place a
residential rental property and axe your interest deduction."
So, if you rented the property out for half the year, or 182 days, you
would have to live in it for 18 or 19 days to get that interest
deduction. Since you'll be living in it for half the year anyway, this
is no problem. You don't have to split it at all-- you just treat it
the same way any other mortgage property would be treated. Property
tax is an expense that can be deducted, as well as mortgage interest,
and they can be deducted for the whole of 2007.
Many thanks for your question and many apologies for the delay in response! :)
Thank you very much for the five stars and the tip as well :)
If you need any additional help let me know and I'll be glad to help you out.
--keystroke-ga
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