|Update: With the passage of the Tax Cuts and Job Act (TCJA) in Dec 2017. Tax incentives for homeowners have dramatically changed. Click here to see what has changed: Buying a Home Under the New Tax Rules.|
You may have more tax deductions than you know
Tax season is just around the corner. Have you already planned for your annual federal and state income tax deductions? If you are a homeowner, your home provides many tax benefits that you can take advantage of. Here’s a breakdown of all the tax credits and deductions—from the time you buy your home through to when you decide to sell it.
Tax Deduction #1: Mortgage Interest Paid
When you own a home you can subtract the interest you paid on your mortgage loan and your property taxes from your total income. The deduction of mortgage interest from tax obligation is a significant benefit because interest payments can be the largest component of your mortgage payment in the early years of homeownership.
Tax Deduction #2: Points
The first year you buy your home, any points (origination fees) you paid to the lender as part of getting your mortgage loan also count as deductions from your income. You can deduct the full cost of any loan origination fees or points as long as the lender calculates them as a percentage of your loan, whether you or the seller paid them at closing. For refinance on the first home or a second home, discount points must be amortized over the life of the loan
Tax Deduction #3: Equity Loan Interest
In addition to your mortgage interest, the interest you pay on a home equity loan can be tax deductible as an itemized deduction. However, the IRS places a limit on the amount of debt you can treat as “home equity,” your total 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.
Tax Deduction #4: Home Improvement Loan Interest
If you took out a home loan to pay the contractor and for materials for your home improvement, you might be able to write off the interest. However, these home improvement must be a “capital improvement” rather than ordinary repairs. Capital improvements are those that increase your home’s value, prolong its life, or improve it to new uses.
Tax Deduction #5: Work-at-home homeowners deduction
If you work at home, you can deduct expenses for a qualified office, these include phone lines, heating and electric expenses and home renovations — including a portion of mortgage interest, property taxes, and insurance.
Tax Deduction #6: Mortgage-Debt Relief
If you relinquished your home in a foreclosure or short sale in 2015 or if one of these unfortunate events happens to you in 2016, you may be able to take advantage of the latest extension of the Mortgage Forgiveness Debt Relief Act of 2007. Under this act, taxpayers can generally exclude income resulting from the discharge of debt on their principal residence.
Tax Deduction #7: Capital Gains Exclusion
You can also get a tax break when you sell your home. Let’s say you purchased your home for $150,000 and was able to sell it for $200,000, you have $50,000 profit. The federal government imposes capital gains tax to people who earn profit from selling valuable possessions. For homeowners who lived for at least two of the past five years in their home, they are excluded from capital gains tax. Meaning, that 50,000 is a non-taxable! When you sell a home, you can keep profits up to $250,000 if you are single and up to $500,000 if you are married.
Tax Deduction #8: Moving Costs
If you moved because of your job, whether it’s a new job or working at the same company in a different location, you may be able to deduct your moving expenses on your income tax return. Moving cost deductions can include travel or transportation costs, expenses for lodging, and fees for storing your household goods.
Tax Deduction #9: Private Mortgage Insurance
If you have a secondary home as long as it is not a rental unit, Private mortgage insurance may be deductible.
Tax Deduction #10: Real Estate Tax
Your property taxes are fully deductible from your income.
Tax Credit #1: Energy Efficiency Upgrades
An energy-efficiency tax credit may apply to storm doors and energy-efficient windows, insulation, air-conditioning and heating systems. The maximum tax credit for all home improvements is up to $500. Homeowners who purchase qualified residential energy-efficient property may be eligible for a tax credit.
Tax Credit #2: Mortgage Tax Credit
A Mortgage Credit Certificate or MCC is a certificate that allows you to take a federal income tax credit for a portion of the annual interest you pay on your mortgage loan for your their primary residence. The maximum credit is $2,000 per year if the certificate credit rate is over 20%. You must first apply to your state or local government for an actual certificate. This credit is available each year you keep the loan and live in the house purchased with the certificate. The credit is subtracted, dollar for dollar, from the income tax owed.