Tax Tips for Homeowners
At tax time, owning almost always trumps renting. That’s because Uncle Sam lets homeowners tap a laundry list of deductions or exemptions on everything from mortgage interest and capital gains on a home sale to maintaining a home office or even owning a second property. Of course, not all deductions apply to all homeowners. But if you’re interested in taking advantage of the deductions available to you, it’s wise to run through your options with your tax preparer or the Internal Revenue Service, care of www.irs.gov or 1-800-829-1040.
Mortgage interest: You can deduct the interest portion of your mortgage payments each year. This applies to the interest from both your primary mortgage and any second mortgage you may have on a property, such as a home-equity or home-improvement loan. The IRS provides more information here:http://www.irs.gov/publications/p521/index.html.
Points on a loan: Points amount to 1 percent of a loan’s principal, and lenders may charge points as part of your loan. You can deduct points on the purchase of a home but not points for a mortgage broker’s fees. You can deduct points when you buy a home or refinance a home loan. The IRS provides more information here:http://www.irs.gov/publications/p521/index.html.
Mortgage insurance: If you bought a home in 2007 or beyond and must pay mortgage insurance—which applies to buyers who make down payments below 20%—you could deduct it. You have to have adjusted gross income of less than $100,000, but the deduction is a nice offset to the $50 to $100 in mortgage insurance many homeowners pay each month. The IRS provides more information here:http://www.irs.gov/formspubs/article/0,,id=109876,00.html#mip_2007.
Property tax: Local and state-level property taxes are deductible. If you are disabled, elderly or own a property eligible for listing on a historic registry, you may be eligible for property-tax exemptions or reductions in the total amount of property tax owed. The IRS discusses property tax deductions here: http://www.irs.gov/taxtopics/tc503.html.
Capital gains: Single homeowners need not pay taxes on the first $250,000 of profit, or capital gains, on the sale of their home. For married homeowners, the figure is $500,000.To take this exemption, you need to have lived in the property for at least two of the past five years. For more information, see IRS Publication 523, available online athttp://www.irs.gov/publications/p523/index.html.
Home office: Homeowners can deduct a percentage of their home’s costs proportionate to the percentage of the home used as an office. For more information, see IRS Publication www.irs.gov/pub/irs-pdf/p587.pdf.
Home-sale expenses: A few sellers who face capital-gains taxes may be able to offset them by deducting agents’ commissions, legal costs, title fees, marketing and inspection fees. You may also deduct repairs and renovations completed up to 90 days before you list the home for sale, if those repairs were done to make the home more marketable. The IRS provides more information in publication 523 regarding the sale of a home: http://www.irs.gov/publications/p523/index.html.
Energy-related tax credits: Homeowners who upgrade their properties with energy-efficient heating or cooling systems, windows, doors, insulation and other systems designed to reduce energy waste may be eligible for tax credits. According to Energy Star, an organization promoting energy efficiency, the maximum tax credit for all improvements is $500 during the two-year period of the credit, which applies to property improvements made between Jan. 1, 2006, and Dec. 31, 2007. For more information, see Energy Star: www.energystar.gov/index.cfm?c=products.pr_tax_credits#s2.
Moving costs: Buyers and sellers moving 50 or more miles from their last address and who move within one year of starting a new job may deduct moving costs, storage costs or moving-related travel costs such as lodging and food. To qualify, you must prove you’ve worked at least 39 of 52 weeks at your new job once the move is complete. The IRS provides more information about deductible moving costs in Publication 521:http://www.irs.gov/publications/p521/index.html.
Vacation/second home: If you own a second home, you are eligible for many of the same tax breaks applicable to a primary home. The IRS allows the above-listed deductions on one primary home plus one second home. If you rent the second home out, you will need to decide whether you are, for tax purposes, treating the place as investment property or as a personal retreat. Deductions will differ depending on your decision. The IRS provides more information care of www.irs.gov in Publication 17, Publication 530, and Tax Topic 503.