Top Ten Homeowner Tax Deductions
By owning your home, you are eligible to receive many tax benefits throughout the time you spend in your home. Many of the homeowner tax deductions are related to the mortgage used to finance your home but not all so make sure that you are taking advantage of any deductions for which you qualify.
Here are the top ten on the homeowner tax deduction list:
- Mortgage Interest – After you purchase a home, you are allowed to deduct all of your interest payments on any mortgage up to $1 million. There are restrictions on this, however. First, you can only deduct the interest on a mortgage up to $1 million if you are married and filing jointly. If you are married and filing separately, both you and your spouse can only claim interest up to $500,000. Next, the mortgage debt must be secured by a first or second home. Lastly, if you paid in full for the house, you cannot later take out an equity loan with the house as collateral and deduct the interest on the home equity loan.
- Points – One thing that many people fail to fully understand is the point system that mortgage lenders often use. Put simply, one point is equal to 1% of the principal of the loan. It is common to see fees in the amount of one to three points on a home loan. These fees are included on the income tax deductions list and can be fully deducted provided they are associated with the purchase of a home. If you are refinancing your home mortgage, then these points are still fully deductible, but must be done so over the life of the loan and not up front. Those that do refinance their homes can write off the remainder of their old points. Review your closing statement for the amount (if any) points paid.
- Equity Loan Interest – Some people may be able to deduct some of the interest paid on a home equity loan (line of credit). However, the Internal Revenue Service limits The amount of debt that can be treated as home equity for this tax deduction is limited to the smaller of:
– $100,000 if filing jointly, or $50,000 for each person of a married couple if filing separately; or
– Your home’s total fair market value minus certain outstanding debts against the home.
- Interest on a Home Improvement Loan – The fourth item on the tax deductions list is the interest on a home improvement loan. Many people find it necessary to take out a loan to make improvements to their homes, as well as for repairs and fixes. It is important to distinguish these two types of work, however, because only the interest on loans taken out for home improvements may be deducted from your income taxes.
A qualifying loan is one that is taken out to add “capital improvements” to your home, meaning the improvement must increase your home’s value, adapt it to new uses, or extend its life. Examples of capital improvements are: adding a third bedroom, adding a garage, installing insulation, landscaping and more. Loans that do not qualify for a home improvement loan interest deduction are those that are taken out for repairs only. Examples of repairs including painting, plastering, fixing broken windows, replacing cracked tiles and more.
- Property Taxes – Property taxes are fully deductible from your income taxes on your Form 1040. However, if your money is being held in escrow for the purpose of paying property taxes, you cannot claim this deduction until the money is actually taken out of escrow and paid. In addition, if you receive a partial refund of your property tax, this reduces the amount of the deduction you can claim.
- Home Office Deduction – If you use a portion of your home exclusively for the purpose of an office for your small business, you may be able to claim a deduction on your taxes for costs related to insurance, repairs, utilities and depreciation.
- Selling Costs – After you have decided to sell your home, you may be able to reduce your income tax by the amount of your selling costs. These costs can include things like repairs, title insurance, advertising expenses, real estate broker’s commissions, and inspection fees. However, the IRS only allows you to deduct repair costs associated with selling costs if the repairs are made within 90 days before the sale, and the repairs were made with the intention of improving the marketability of your home.
Selling costs are deducted from your gain on the sale. The gain on the sale of your home is found by taking the selling price and subtracting the closing costs as well as your tax basis. Your tax basis is a technical term which can be found by taking the original purchase price and adding the costs of any capital improvements you made to the home and finally subtracting any depreciation.
- Capital Gains Exclusion – When you sell your home, you may be able to keep some of the profit as tax-free income. If you are married and filing jointly, you may claim up to $500,000 in profit from the sale of your home provided that you used the home as a principal residence for two of the previous five years. If you are filing either as single or married but filing separately, you may keep up to $250,000 of the profit tax-free.
- Moving Costs – If a new job requires you to move so you can begin work, you may be able to deduct a portion of your moving costs from your income taxes. There are a couple of requirements that you must meet in order to be able to make these deductions. First, your new job must be at least 50 miles farther from your old home than your previous job was. Second, you must work full time for at least 39 weeks during the 12 months following your move. Moving costs deductions may include items such as transportation, lodging and storage fees.
- Tax Deductions for Investment Properties – There are many tax benefits available for investment properties. Rather than detail them here, here is a link to an article discussing the top 10 tax deductions for investment properties. Make sure that you are taking advantage of these valuable benefits.
Finally, if you sold your home as a short sale or your home was sold as a foreclosure, you should have received a 1099-C reporting the amount of cancelled mortgage debt as a result of the sale. This cancelled debt is considered taxable as ordinary income. It is highly recommend that you consult with an accountant on filing your taxes after a short sale or foreclosure.
The Mortgage Forgiveness Debt Relief Act remains in effect through the end of 2016. If you sell your principal residence as a short sale, you may meet the requirements of this act and avoid taxation of the cancelled debt. Again, consult an accountant.
Homeowner tax deductions remain as the most valuable and most used tax breaks available. Make sure that you are fully realizing the value of your home.