Tax breaks are a nice benefit to home ownership. So whether you’re doing your taxes yourself or getting help from a professional, it’s important to take advantage of those breaks! These tax breaks are available for any abode — mobile home, single-family residence, town house, condominium or cooperative apartment.
A standard deduction may have made the most sense when you prepared your taxes before buying your home. But to take full tax advantage of your home, in most cases, homeowners itemize. This requires you to file Form 1040 and a Schedule A, where you can detail your tax-deductible expenses. Only you can decide if itemizing is well worth it at tax time.
MORTGAGE INTEREST DEDUCTIONS
If you're like most homeowners, the bulk of your mortgage payment every month goes towards interest. That's the bad news. The good news is that you can deduct the interest portion of your mortgage payments.
If you pull out extra cash through refinancing, or if you take a home equity loan or line of credit, equity debts of $100,000 or less are fully deductible (generally speaking).
If you take out a loan to make substantial home improvements, you can deduct the interest, with no dollar limit. However, the work must be a "capital improvement" rather than ordinary repairs.
Qualifying capital improvements are those that increase your home's value, prolong its life, or adapt it to new uses. Qualifying improvements might include adding a new roof, fence, swimming pool, garage, porch, built-in appliances, insulation, heating/cooling systems, landscaping or more. Be mindful, though, that increasing the square footage of your home could trigger a reassessment and higher property taxes.
General maintenance doesn't qualify for an interest deduction. Repairs such as repainting, plastering, wallpapering, replacing broken or cracked tiles, patching your roof, repairing broken windows, and fixing minor leaks do not qualify.
If you own more than one property, mortgage interest on the second is also fully deductible. Notice I used the word "property" and not "home" or "house." While it can be a home, as long as that second property has cooking, sleeping and bathroom facilities, it qualifies. Think boat or RV.
You can even rent out your second property for part of the year and still take full advantage of the mortgage interest tax deduction as long as you also spend some time there. The caveat being that if you don't vacation at least 14 days at your second property, or more than 10% of the number of days that you rent it out (whichever is longer), the IRS could consider the place a residential rental property which would disqualify you for interest deduction.
IRS Publication 936, Home Mortgage Interest Deduction, explains the details.
Your mortgage lender will charge you a variety of fees, one of which is called "points." One point is equal to 1% of the loan principal. One to three points are common on home loans and can easily add up to thousands of dollars, if you paid points:
- to get a better rate on any home loans.
- on a refinanced loan.
- to home equity loans or lines of credit.
When you can claim them, whether it can be all at once or amortized over the life of the loan, varies in each instance.
You can learn more from IRS Publication 936, Home Mortgage Interest Deduction.
Property, aka "real estate taxes," should be an annual deduction for as long as you own your home. If you have an impound or escrow account, you can't deduct escrow money held for property taxes until the money is actually used to pay your property taxes. A city or state property tax refund reduces your federal deduction by a like amount.
There are specific criteria that have to be met in order for you to deduct home office expenses, but it can lead to a very large deduction. In general, your home office has to be used specifically for business purposes. You may be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation. For details, see the book Home Business Tax Deductions: Keep What You Earn, by Stephen Fishman (Nolo).
WHEN YOU SELL
Real estate brokers' commissions, title insurance, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees are all considered selling costs. All selling costs are deducted from your gain. Your gain is your home's selling price, minus deductible closing costs, selling costs, and your tax basis in the property.
If you've owned the property for two years and lived in it for two of the five years before the sale, up to $250,000 in sales proceeds ($500,000 for married, jointly filed) is tax-free. The IRS only makes exceptions for the two-year residency requirement of the sale is due to a change in the owner's health, employment or unforeseen circumstances and, even then, the tax-free gain is prorated.
What is considered an "unforeseen circumstance" you ask?
- Divorce or legal separation
- Job loss that qualifies for unemployment compensation
- Employment changes that make it difficult for the homeowner to meet mortgage and basic living expenses
- Multiple births from the same pregnancy
If you sold because damage was incurred from a natural or man-made disaster or the property was taken under eminent domain law by the government, a partial exclusion can be claimed.
If you sell your second home, there are some possible tax benefits depending on how long you used it as a second residence.
You may be able to deduct some of your moving costs if your move is prompted by a new job. There are several IRS requirements to qualify you for these deductions. For instance, your new job must be at least 50 miles farther from your old home compared to your former job. Travel or transportation costs, expenses for lodging and storage fees may be included in moving cost deductions.
So, as you can see, there are many tax advantages to owning, buying and selling a home. Until next time, happy returns!
The material available in this blog is for informational purposes only and not for the purpose of providing tax, legal or accounting advice.You should consult your own tax, legal and accounting advisors before engaging in any transaction.