Are You Taking Full Advantage of Real Estate Tax Deductions?
As the year winds down, it may be a good idea to start planning for how your taxes will work out for the year. As a homeowner (even if it’s a rental property), there are tax deductions available this year that might not be available next year. So take a few minutes and read over some of the major tax deductions available to homeowners, and ensure your tax liability is as small as it can be this year.
The mortgage payment you make each month is likely to be your biggest tax break. For most homeowners, the majority of what is paid is actually interest, rather than principle. All that interest can be deducted (unless your loan is more than $1 million).
Home Improvement Loans
Just like the mortgage interest on your first loan, the interest on a home equity loan used for “capital improvements” to a home can also be deducted. This is for loans with balances of up to $100,000. The interest on that loan, is then tax-deductible for a homeowner who uses the loan to make improvements to the home such as adding square footage, upgrading the components of the home, or repairing damage from a natural disaster. Even regular home improvements may give you an advantage. According to the IRS, home improvements are jobs like plumbing, wiring, installing air conditioning, or putting on a new roof with the best roofing company, so long as these improvements add value and prolong your house’s life. While you can’t necessarily deduct these improvement costs, you can add the price of materials and labor to the basis of your home. This can reduce the tax owed on the sale of your home in the future should you decide to sell it.
Did you buy your house this year? If so, be sure to claim the points that you may have paid to get a better rate on your loan! This is a tax break only available in the year you paid them. First, you’ll need to make sure your loan meets all the qualification requirements so that you can deduct points all at once. Also, if you refinanced a loan, the points you paid may be deductible.
Those property taxes you’ve been paying all year (the part of your loan payment that goes into an escrow account for a once a year payment), well those can be deducted too. If this is your first tax year, be sure to check the settlement papers you got at closing to find additional tax payment information. You likely split the taxes with the previous owner pro-rata.
If you work out of your home, you may be able to deduct a portion of the mortgage for this use, if you meet specific requirements. This may be a bit tricky, so be sure to speak with a professional about this to ensure you do it the right way.
When the housing market crashed, the Federal Government created the Mortgage Debt Forgiveness Relief Act of 2007. This Act allowed an underwater homeowner to be forgiven the difference between the value of his home, and what the homeowner actually owed. Without this, the difference may be considered cancelation of debt income by the IRS. This Act has been extended only through 2013, so this may be the last year to benefit from this Act. Check this Payday Loans guide from Saving Advice for more info.
Private Mortgage Insurance (PMI)
This was almost lost this year, but luckily for many homeowners, has been extended. If when you purchased your home, you made a down payment of less than 20%, you are usually paying some kind of Private Mortgage Insurance. To qualify for this deduction, your mortgage needs to have originated after January 1, 2007. Also, this deduction is phased out, 10% per $1,000, for taxpayers who have an adjusted gross income between $100,000-$109,000. If you make more than $109,000, you do not qualify. This again has some nuanced rules, and should be discussed with a professional.
There are many advantages to being a homeowner, and these tax considerations are just a few. To take full advantage of your home however, your taxes will be more complicated to file. Most homeowner will itemize their deductions. To do so, you can no longer file the EZ forms, but will need to use the 1040 long form and Schedule A. But the hassle is worth the savings. While this was a short overview of some of the deductions and saving that can come your way from owning a home, a professional real estate lawyer should be consulted to make sure that you are getting all the deductions you qualify for, and that your are doing so the correct way.
Written By Bert Millett – Gunderson, Denton & Peterson, P.C.
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