When it comes time to prepare yearly income taxes, homeowners have an opportunity to deduct many home-related expenses. Be aware that you can only choose to take deductions if you itemize rather than take the standardized deduction.
Although this complicates your income taxes a bit by requiring you to use Form 1040 rather than Form 1040EZ, as well as requires that you use Schedule A, many homeowners find itemizing their taxes to be to their advantage. If you do find that itemizing makes sense for you, here are ten tax advantages you should understand as a homeowner.
1. Mortgage Interest
The biggest tax break you can receive by owning a home is a deduction on the mortgage interest you pay. All the interest you pay towards your home loan, unless your loan is more than $1 million, can be deducted.
The great thing is that if you happen to own two homes, the interest on the second home is also fully deductible as long as you have spent at least some time there. The IRS says that you must spend the greater of at least 14 days at your second property or more than 10% of the number of days you rent it out to take the deduction. Amazingly, your “second home” doesn’t have to be a house at all. It can also be a boat or RV as long as it has cooking, bathing, and sleeping facilities.
To take this deduction, you will need a copy of Form 1098: Mortgage Interest Statement. Your lender will send it to you so that you know how much mortgage interest you paid during the year.
2. Equity Loan Interest
If you have taken a loan out on the equity of your home (HELOC), you may be able to deduct some of the interest on this loan as well. However, the IRS has stiff limits to the amount of home equity that qualifies. If you are married filing jointly, you are limited to the smaller number of $100,000 or the total of your home’s fair market value minus outstanding debt. Once again, your lender will send you a Form 1098 with the mortgage interest you paid.
3. Interest on a Home Improvement Loan
If you took out a loan for the improvement of your home, the interest is deductible in full up to $100,000. However, the loan must be made to make capital improvements and not just ordinary repairs. Capital improvements increase the value of your home, prolong its use, or adapt your home to new uses. A partial list of improvements that qualify as capital improvements include:
- New Roof
- Fencing
- Garage
- Porch or Deck
- Swimming Pool
- Built-In Appliances
- Insulation
- Heating/Cooling
- Landscaping
Items that do not qualify include things such as painting, wallpapering, patching the roof, repairing broken windows, or fixing small leaks. Keep in mind, improving your property will give you a tax credit in the year you performed the work, but it may also increase the tax value of your home increasing your yearly taxes.
4. Points
If you purchased or refinanced your home this year, you will be able to write off the amount of the points you paid on your loan. For a loan on a first home, you take the deduction in the year you made the loan. For a second home loan or a refinance, you will spread the deductions out over the life of the loan. So, if you paid $2,000 in points on a first loan, you can get a $2,000 deduction on your taxes. However, if you paid $2,000 in points on a 30-year refinance, you will have to deduct the $2,000 over the 360 month loan period, or $66.72 a year. Form 1098 will let you know how much in deductible points you paid for the year.
5. Property Tax
If you own a home, you most likely pay taxes to a local, state, or foreign government. These taxes are deductible in most cases.
If you pay your taxes through a mortgage escrow account, the property taxes will show up on your escrow statement. Be sure to deduct only the amount paid out of escrow and not the amount you paid into the escrow account. The deduction is for actual taxes paid and not money put away into escrow for eventual payments.
For those that purchased a home this year, check your HUD-1 settlement statement to see if you paid any taxes when you purchased the home. If you did, those are deductible in the year you bought the home.
6. Energy Efficiency Tax Credit
This credit is one that you need to use before it expires December 31, 2016. If you made your home more energy efficient, the IRS will give you a tax credit of 10% of the improvement up to $500 or $200 towards windows. Energy efficient improvements include storm doors, windows, insulation, and new heating and cooling systems.
7. Renewable Energy Tax Credit
This credit is also expiring December 31, 2016. It covers the installation of renewable sources of energy sun as sun and wind. You can get up to 30% of the cost of equipment and installation if these sources are in place by the deadline.
8. Home Office Deduction
If you have a home business and use a portion of your home exclusively for that business, you can deduct some of the costs related to keeping that portion of the home. For instance, if your home office makes up 10% of your home’s square footage, you will be able to deduct 10% of your insurance, repair costs, and depreciation.
To do this, a portion of your home must be used exclusively as your principal place of business or storage for your business for things such as samples or inventory.
9. Selling Costs
Most people do not live in the same place throughout their lives. If you are planning to sell your home, you should keep up with the costs associated with selling your home. You will be able to reduce your capital gain tax by this amount. Here are some costs you should consider:
- Real Estate Broker’s Fees
- Title Insurance
- Legal Fees
- Advertising
- Escrow Fees
- Inspection Fees
- Repair costs made within 90 days of the sale made to improve the marketability of the home
10. Mortgage Tax Credit
The Mortgage Credit Certificate (MCC) is a program for low-income, first-time homebuyers. This program allows qualified buyers to deduct up to 20% of their mortgage interest payments up to $2,000 as a tax credit on their income taxes. The homebuyer can then calculate the remaining mortgage interest paid as an itemized deduction. You have to apply with your state or local government to be issued a certificate.
