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What Tax Benefits are Available to Homeowners?

March 10, 2014

As April approaches, Americans across the country are consulting with their accountants and claiming their deductions to ensure they take advantage of the various tax benefits that may be availalbe.  Whether writing off a business expense, calculating charity contributions, or deducting your mortgage interest rates, filing taxes can be an overwhelming, stressful, tedious process to those who are looking to maximize their return and reduce what they owe.

Homeowners receive plenty of advantages during tax season when claiming deductions.  In fact, the U. S. Tax Code is designed to offer incentives to homeowners.  Whether your home is paid in full or financed with a mortgage, there are several tax-saving opportunities that may accompany home ownership.  If any of the following tax perks are applicable to your situation, we recommend that you address your inquiries to an accountant or tax professional who can determine your tax liability based on certain qualifications and regulations.

1.  Mortgage Interest Rates:  Deducting your mortgage interest is often the biggest tax break offered to homeowners, especially early in the home’s loan.

  • The standard mortgage amortization schedule is front-loaded with mortgage interests, which means annual interest payments on a 30-year loan term exceed annual principal payments until the loan’s tenth year.  In other words, your mortgage payments during this time are primarily on the mortgage interest, which can be deducted.
  • Interest from second mortgages, refinances, home equity loans, and home equity lines of credit may also be tax deductible.  However, there are restrictions if the mortgage debt extends beyond the property’s fair market value.  Generally, equity debt of $100,000 or less may be fully deductible.
  • Interest from a second home, boat or RV may also be considered deductible.  As long as the property has cooking, sleeping and bathroom facilities, even if you rent it out as a second property, there may be tax perks!
  • Consult with a tax professional or accountant to examine your personal situation and evaluate your options.

2.  Discount Points:  This is a one-time fee that occurs at closing in order to allow the borrower access to mortgage rates that are below the current market rates.

  • Discount points are treated as “prepaid mortgage interest” by the IRS, which may make them eligible for tax deductions.
  • As long as discount points are paid in conjunction with a home purchase, the cost may be deducted in full (dollar-for-dollar) in the year they were paid.
  • If you are refinancing your home or taking out a line of credit, discount points paid will be amortized over the life of the loan.  Therefore, any eligible deductions may depend on the amortization schedule, rather than deductible in full the year it was paid.  For instance, the cost of one discount point on a 30-year loan may be deducted at 1/30 of its value in a calendar year.
  • Verify that your loan meets the qualification requirements and ensure that you are deducting the right amount by consulting with a tax advisor or accountant.

3.  Real Estate Taxes: As a homeowner, you pay annual real estate taxes to local and state entities.

  • Any taxes paid to local or state entities may be deducted in the year which they are paid.
  • To deduct your real estate taxes, file your annual statement with your federal tax return.
  • Speak with an accountant or tax advisor to execute the steps properly and verify your liability.

4.  Home Improvements:  Various types of home improvements may be considered tax deductible.

  • If you or a family member living in your home has a medical issue that requires modifications to your home, the costs of those modifications may be up to 100% tax deductible.
  • Any repairs and improvements made for aesthetic purposes may not be tax deductible.  However, keep your receipts, as these improvements may be deducted from the profit when you sell your home!
  • Of course, should you need any clarification regarding your situation, consult with a tax professional or accountant!

5.  Home Offices:  If you work from home, you may be allowed to deduct the expense of maintaining a qualified home office.

  • These tax benefits may include renovations to the room, the addition of a separate telephone line and the cost of heating, cooling, and lighting the room.
  • There are special requirements of what constitutes a “home office” for tax purposes.  To avoid increasing your risk of being audited, make sure you address your home office with your accountant or tax professional to understand the benefits and liabilities!

6.  Selling Costs:  When you sell your home, you may be allotted several possible tax deductions that include:

  • Agent commission, title insurance, legal fees, any advertising costs incurred, administrative costs, escrow fees, and inspection fees.

7.  More Tax Benefits When Selling Your Home:  Since 1997, $250,000 in sales gain (or $500,000 if married, filing jointly) may be considered tax-free IF:

  • The owner owned the property for at least two years and lived in it for two out of the last five years prior to selling.
  • If the home was sold before meeting ownership and residency requirements, tax must be paid on any profit, unless the move is due to health, employment or unforeseen circumstances.
  • Ask your accountant or tax professional to be sure you are meeting these requirements.

8.  Home Improvement Deductions for Sellers:  When you sell your home, you may lessen the tax burden on profits that exceed $250,000 (or $500,000 if married, filing jointly) by deducting any home improvement costs from the gain.

  • Deduct the improvement costs from the gain (gain = home’s selling price – selling costs + tax basis).
  • Your gain – the home improvement costs will determine your tax liability from the profit of the sell.
  • Remember to seek counsel from your accountant or tax advisor, as these rules and regulations can be tricky!

9. Moving Costs:  If you are moving because of a new job, you may be eligible to deduct your moving costs if your situation meets several IRS requirements.

  • One requirement is that your new job must be 50 miles farther from your old home than your previous job was.
  • If you meet all IRS requirements, you may be allowed to deduct travel and transportation costs, lodging expenses, storage fees, and other expenses related to your move.
  • See your accountant or tax professional for expert advice in regards to your individual situation and requirements.

10.  Non Deductible Expenses:  To avoid confusion, there might be a few expenses that may not be considered tax deductible.  Prior to meeting with your accountant or tax professional, understand that the following expenses may not be eligible to receive tax deductions:

  • Insurance, including private mortgage insurance, may not be deductible unless you meet the requirements under a special PMI Law.  This is because you are paying this insurance as a result of not fronting enough money for a down payment.
  • Property hazard insurance premiums may be non-deductible, even though coverage is required as part of the home loan and included in your monthly payment.
  • HOA dues.
  • Additional principal payments.
  • Home depreciation.
  • Closing costs.
  • Local assessments that increase neighborhood value, such as sidewalks and street lamps.
  • Miscellaneous home repairs (see accountant or tax advisor for further details).

It is important to note that Connect Realty provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

In addition, this article is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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