One great advantage to owning a home is the potential tax benefits. These tax breaks are available for any dwelling—mobile home, single-family residence, townhouse, condominium or cooperative apartment. The significant federal tax breaks to homeowners are also permitted by most states. For complete details on how deductibility of home loan interest and other expenses will affect your specific tax situation, ask your tax advisor. Or review a copy of IRS Publication 936, Home Mortgage Interest Deduction. Or you can call 1-800-TAX-FORM (1-800-829-3676) to order a free copy.
The information provided below is designed to help you figure your possible tax breaks. It is a quick look at homeowner expenses you may be able to deduct, expenses that are normally not acceptable deductions, and some tax tips. Since all homeowners have different tax situations, it is advisable to work with a financial adviser or the IRS to get the most from owning your own property.
For your primary residence you can deduct:
Interest on your home loan or mortgage. For most people, the best home deduction is for mortgage interest. And all that interest is deductible, unless your loan is more than $1 million. If you're the proud owner of a multimillion-dollar mortgaged mansion, the Internal Revenue Service will limit your deductible interest. . Interest tax breaks don't end with your home's first mortgage. You may be able to deduct some of the interest you pay on a home equity loan or line of credit. However, the IRS places a limit on the amount of debt you can treat as home equity debt for this deduction. Your total home equity debt is limited to the smaller of:
· $100,000 (or $50,000 for each member of a married couple if they file separately), or
· the total of your home's fair market value -- that is, what you would get for your house on the open market -- less certain other outstanding debts against it.
The IRS rules about the home equity loan interest deduction are complicated. IRS Publication 936, Home Mortgage Interest Deduction, available at www.irs.gov, explains the details.
Mortgage interest on second homes can also be fully deductible. In fact, your additional property doesn't have to strictly be a house. If it has cooking, sleeping and bathroom facilities it may qualify as a second home according to IRS guidelines. 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. However. 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 you will not be able to take the interest deduction.
These expenses are deducted from gross income before calculating the taxes owed. For example, if you pay $20,000 a year in home equity loan interest, you deduct $20,000 from your gross income. This can make a huge difference in your tax bill.
Property taxes
Taxes
The other major deduction in connection with your home is property taxes.
After mortgage interest, the biggest part of most monthly loan payments is taxes. These taxes go into an escrow account for payment once a year. These taxes will be an annual deduction as long as you own your home. If this is your first tax year in your house, check the settlement sheet to find additional tax payment data. When the property was transferred from the seller to you, the year's tax payments were divided so that each of you paid the taxes for that portion of the tax year during which you owned the home. Your share of these taxes is fully deductible. If your settlement statement shows any money you paid into an escrow account for future taxes, this amount is not deductible. You can only deduct the taxes in the year your lender actually pays them to the property tax collector.
A note of caution. You cannot deduct charges for services to a specific property or for specific people even if the payments are made to the taxing authority in your area. These include:
- A unit fee for the delivery of a service (such as water delivery).
- A charge for a residential service such as trash collection.
- A flat charge paid for a single service provided to you specifically by your local government.
- Amounts you pay for local benefits that tend to increase the value of your property, such as the construction of streets, sidewalks, or water and sewer systems. But you can deduct whatever you pay for assessments for repairs or maintenance.
Points. Your mortgage lender will charge you a variety of fees, notably what are called "points." A point equals 1% of the loan principal. One to three points are common on home loans, which can easily add up to thousands of dollars. You can fully deduct points associated with a home purchase mortgage. You cannot deduct a mortgage broker's commission.
These points can usually be deducted as a prepayment of interest. Other terms for points are:
· Loan origination fees
- Maximum loan charges
- Loan discount
- Discount points
You may deduct any points you pay, or points your seller paid on your behalf, in the year in which you pay the points, if you meet the following requirements:
- Your loan is secured by your main home (the one you live in most of the time).
- Paying points is normal for your area.
- The amount of the points isn't out in line for your area.
- You use the cash method of accounting for expenses. Using the cash method means you report income in the year you receive it and deduct expenses in the year you pay the points.
- The loan was used to buy, improve, or build your home.
- The points are computed as a percentage of the loan principal.
- The points are clearly delineated on your settlement statement.
- You put cash into your home purchase in an amount at least equal to the points you were charged.
Some points do not meet these criteria. They may still be deductible, but you have to deduct them over the life of the loan. For instance, Points paid for refinancing generally can only be deducted over the life of the new mortgage.
Or, Points you pay on loans secured by your second home can be deducted only over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees are not interest and cannot be deducted. For more details on deducting points, see IRS Topic 504, Home Mortgage Points.
What's not deductible. While many tax breaks are available to a homeowner, there are a number of typical home expenses that are not tax-deductible. If you pay private mortgage insurance because you weren't able to come up with a large enough down payment, it is not a deduction. You cannot deduct your property insurance premiums, even though the coverage generally is required as part of the home loan and is included as a portion of your monthly payment.
Other nondeductible residential expenses:
· Homeowner's insurance premiums
· Fire insurance premiums
· FHA mortgage-insurance premiums
· Principal payments made on your mortgage
· Title or mortgage insurance
· Utilities, such as gas, electricity, water, or trash collection
· Most settlement costs on your closing or settlement statement
· Homeowner's association dues and fees
But hold onto the receipts. Some homeowners may find their property will appreciate beyond the $250,000 ($500,000 for married couples) amount the IRS will let you keep tax free when you sell. If that happens, the records of property improvements could help you establish a higher basis for your house and reduce your taxable profit.
Home Improvement Loan Interest. If you take out a loan to make substantial home improvements, you can deduct the interest on this loan. There is no dollar limit on this deduction. 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. For example, qualifying improvements might include adding a fence, driveway, new room, swimming pool, garage, porch or deck, new built-in appliances, insulation, new heating/cooling systems, a new roof, landscaping, and the like. (Do keep in mind that capital improvements that increase the square footage of your home could trigger a reassessment and higher property taxes.)
Work that doesn't qualify you for an interest deduction includes such repairs as repainting, plastering, wallpapering, replacing broken or cracked tiles, patching your roof, repairing broken windows, and fixing minor leaks. Wait until you are about to sell your home to gain tax benefits from repair work. However, you can use a home equity loan, up to the limits discussed above, to make repairs and deduct the interest.
Moving Costs. If you move because you got a new job, you may be able to deduct some of your moving costs. To qualify for these deductions you must meet all of the following requirements, which get more and more complicated as you read on:
- You must move within one year of starting your new job.
- Your new job must be at least 50 miles farther from your old home than your old job was.
- The distance between your new home and new job can't be greater than between your new home and new job -- in other words, you can't have created a situation where your commute is longer than if you'd stayed put. (An exception, however, is made if your new commute will, in practice, save you time or money, or if your employer insisted on the move as a condition of your employment.)
- You must work full-time at the new workplace for 39 of the 52 weeks following the move. If you are self-employed, you must work full-time for at least 39 weeks during the first 12 months and a total of 78 weeks during the first 24 months after arriving at the new job location.
Deductions include travel or transportation costs and expenses for lodging and storing your household goods.
Mortgage Tax Credit. A home-buying program called mortgage credit certificate (MCC) allows low-income first time homebuyers to benefit from a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home (the amount of the credit varies by jurisdiction). This credit is available each year you keep the loan and live in the house purchased with the certificate.
