As today is tax day, let’s investigate the tax breaks for homeowners associated with buying homes. Most homeowners do better on their taxes by itemizing deductions (as opposed to claiming the standard deduction) due to the many extra write-offs available in home ownership. Below are ten popular tax write-offs available to taxpaying homeowners.
1. Mortgage Interest
3. Home equity loans
4. Adjusting your withholding
5. Home improvements
6. Energy Credits
7. Real Estate Taxes
8. Private Mortgage Insurance premiums
9. Penalty-free IRA payouts for first time home buyers
10. Tax-free profit on sale
Mortgage Interest is one of the biggest tax breaks for homeowners that’s available allowing taxpayers to deduct up to $1 million dollars of debt used to acquire or improve a home. Lenders will send out a Form 1098 in January listing the amount of interest paid toward the mortgage for the previous year.
Points paid to a lender when obtaining a mortgage to buy a house can be written off. Depending on what the points are determines how much and when you can claim that deduction. For instance, a discount point is a charge to a lender in order to buy down the interest rate, which means in essence that point being paid is interest. Therefore a discount point can be written off in its entirety, year one. Other points charged by the lender are fees that can be written off if the cash paid at closing for the down payment is at least equal to the points charged, even if the points were paid by the seller.
Home equity loans are treated just like standard mortgages in the eyes of tax law. Therefore the interest paid on the loan is tax deductible on interest up to $100,000 of home-equity debt. This interest is tax deductible, regardless of how the money is used.
Adjusting your withholding will allows homeowners to receive the mortgage interest deduction almost immediately. When a homeowner purchases a new home, they have the option to file a new W-4 form with an employer, adjusting the federal income tax withholding at work, which will increase the amount of take home pay.
Home improvements are tax breaks for homeowners when they sell their home. Save the receipts and records for all improvements made to a home, such as landscaping, storm windows, fences, a new energy-efficient air conditioning system, and any additions made. These improvements cannot be deducted until the sale of the home; it will be added to the purchase price to help determine the cost basis of the home for tax purposes.
Energy credits are also important tax breaks for homeowners who have invested in energy saving home improvements to their primary residence of up to $500. Credits are available for up to 10% of the cost of energy efficient skylights, outside doors and windows, insulation systems, roofs, and qualifying heating and air conditioning systems. There are also energy tax credits available for installing energy efficient equipment, including solar powered generators and water heaters. On energy efficient equipment and installation, the homeowner is able to write off 30% of the cost, with no dollar cap.
Real estate taxes can be deducted each year. The amount you pay of local property taxes, whether directly to the municipality or via the lender can be written off. If the payments are made by the lender, the amount paid into the escrow account cannot be deducted, only the amount that is paid out by the lender on your behalf.
Private Mortgage Insurance premiums, for mortgage issued in or after 2007, may be deducted. For home buyers who make a down payment of less than 20% of the purchase cost, the lenders will typically require the homeowner to pay a premium for Private Mortgage Insurance. The write off phases out as adjusted gross income goes above $50,000 on married filing separate returns, and above $100,000 for all other returns. Currently this tax break is set to expire in 2013.
Penalty-free IRA payouts, for first time buyers, if the IRA payout is utilized for a down payment on a house. Traditionally a 10% penalty is applied to an IRA investor for removing money before turning 59½. To qualify the money must be used to buy or build a first home within 120 days of the time it’s withdrawn. Yet here’s an interesting loophole, if you haven’t owned a home for two years, you are considered a first time homebuyer. Now this money will still be taxed at your current tax bracket, but the 10% penalty will not be assessed.
Tax-free profit on sale if you have owned and lived in your home for at least two of the five years before the sale, up to $250,000 of profit is tax-fee if filing single, $500,000 for married filing a joint return. Therefore most homeowners do not owe taxes when selling their primary residence!
For any further information on taxes please reference and/or talk to with your tax professional.