A GUIDE TO TAXES AS A HOMEOWNER...
Hey there, homeowner! We’re happy you’ve got a slice of the
American dream, and you’ll get the tax breaks that go along with it. In fact, some
of these tax incentives apply to even a second home. Ooh la la!
Whether you bought, sold or just happily lived in your home
this year, we’ll walk you through all the tax stuff you need to know.
Just skim the “If you …” headers to find the sections that
affect you.
If You Paid Interest on Your
Mortgage …
You should have received a form 1098 from your lender, which
will tell you how much mortgage interest you paid. You can deduct 100%
of your mortgage interest and property taxes, as long as your loan is less than
$1 million, ($500,000 if you are married and filing separately). If it’s over
that, the IRS will limit your deduction. But here’s the catch: You have to
itemize in order to claim the deduction. This is a choice that takes a little math and thought. But basically, you
calculate your total itemized deduction, compare it against the standard
deduction and then take the higher deduction.
You can also deduct late payment charges (please
don’t consider this an incentive to pay late) and pre-payment penalties.
If You Paid Property Tax …
(Hint: You Did)
The property tax you pay each year is deductible. Usually
these property taxes are paid as part of your monthly loan payments, so you can
find that information on the annual statement from your lender. Real estate
taxes can be deducted on federal returns even though they may not be deductible
in the state where the property is situated.
If You Had a Loan Forgiven …
Depending on the time of debt, if a lender canceled it, you could be taxed as though
that canceled debt were income. For example, if you had a mortgage of $10,000,
paid $2,000 and the bank canceled the rest, you would be taxed as though you
had $8,000 of income.
However, thanks to the Mortgage Debt Forgiveness Relief Act of 2007, the
IRS will not charge income tax on a canceled debt. That means if you got a loan
modification, short sale or foreclosure on your primary residence, you won’t be
hit with a tax bill for it. This applies to up to $2 million in debt ($1
million if you are married, filing separately), that you took on to:
· Buy your primary
home
- Improve your primary home
- Refinance the loan for your primary home
This will only be in effect through 2012, so if you are
considering a loan modification or other cancellation of debt, try to fit it in
this year if possible.
If You Made Energy-Efficiency
Improvements to Your Home …
The Nonbusiness Energy Property Credit is for homeowners who
made energy-efficient improvements such as installing insulation, new windows
or furnaces. For 2011, you can get a credit worth 10% of the cost of the
qualified efficiency improvements you made. You can claim up to $500 over your
lifetime.
What if your electricity comes from your own green sources?
You should check out the Residential Energy Efficient Property Credit. This
credit gives homeowners 30% of what they spend on qualifying property such as
solar electric systems, solar hot water heaters, geothermal heat pumps, wind
turbines and fuel cell property. No cap exists on the amount of credit, except
for fuel cell property.
If in this coming year you decide you want to go green for
your home, the IRS suggests that you check for a certification statement that
the item is eligible for a tax credit before you purchase. This can normally be
found on the packaging or the company’s website. Full details are available on Form
5695.
If Your Home Was Damaged in a
Disaster …
If your home was damaged by a disaster like a tornado or
fire, you might be able deduct the amount that wasn’t reimbursed by home insurance. To do so, you need to know your AGI. Then multiply that by 10%, and
subtract that and $100 from the amount of damage not reimbursed.
Example: Let’s say
your home sustained $20,000 in hurricane damage, but you were only reimbursed
$10,000 by your insurance company. $20,000-$10,000 = $10,000 in unreimbursed
damage. Your AGI is $70,000, so $70,000 x 10% = $7,000. $10,000 – $7,100 =
$2,900 in deductible damage.
Special Note: Should You Take the
Home Office Deduction?
Provided you are actually eligible for the home office
deduction (learn more so you don’t get audited), deducting
the expense could either be a smart decision or a poor one. That’s because once
you claim that home office, it doesn’t count as part of your private residence
anymore. When you sell your house sometime down the line, you’ll either make a
profit or a loss. If you make a profit, the value of your home office will be
taxed as a capital gain, at a maximum rate of 25%, costing you money. If you
make a loss selling your home, you can deduct the value of the home office as a
loss, making you money.
How the math works out for your depends on your situation,
so it’s smart to talk to your tax preparer before you deduct your home office.
If You Paid Closing Costs …
Any origination fees that you paid your mortgage lender at
closing are deductible, even if your lender paid the closing costs. You
can find the exact figures on your HUD-1 settlement statement, which you
received from your escrow provider or title attorney at or just after closing.
If you can’t seem to find it, contact your real estate agent or mortgage broker
to request it.
If You Paid Property Taxes … (Hint:
You Probably Did)
Like we explained above, usually your property taxes are
paid to your lender as part of your loan. But if you bought your house this
year, you probably paid your fair share of the property taxes upfront. You can
find out how much you paid on your settlement documents, and deduct it.
If You Paid Mortgage Discount Points
…
When you pay a “point” toward your mortgage, that means you
paid the equivalent of 1 percentage point of your loan upfront at closing in
order to get a lower interest rate. This doesn’t go to pay off your loan, but
it can save you money in the long run, which is why people do it. If you paid
mortgage points, you can deduct them if:
- The loan is secured by your primary residence
- The loan was used to buy, improve or build the home
- Paying points is a common practice in the geographic area of your new home
- The points are calculated as a percentage of the loan principal
- The points are clearly outlined on the buyer’s settlement statement, and
- The amount of cash you put into the purchase of your home (including down payment, closing costs, etc.) is at least equal to the amount you were charged for the points you paid on the loan
If you paid points to refinance your home instead of buying
or improving your home, you deduct a portion of what you paid each year, spread
out over the life of the loan. For example, if you paid 1,000 in points to
refinance a 10-year loan, then you could deduct $100 each year.
If You Took Out a Personal Home
Equity Loan …
What if you took out a home equity loan to pay for something
other than your home, like tuition or home improvements? Well, it depends. Part
or all of the interest you pay on that loan could be deductible for up to
$100,000, or $50,000 if you are married filing separately. Here’s how the math
works when it comes to tuition:
Let’s say your home is worth $200,000. You currently have a
mortgage worth $150,000. So your home is worth $50,000 more than the mortgage.
If you take out a home equity loan to pay for tuition, then you can only deduct
the interest on $50,000 of that loan. That number would be the same whether you
took a loan out for $60,000 or $200,000—you can only deduct interest on $50,000
of that loan.
If you find yourself getting hit with the alternative
minimum tax (AMT), then you cannot deduct any portion
of the interest on a home equity loan when calculating AMT.
However, if you used that $60,000 loan to build a shed and
install a pool, you can deduct all of the interest whether or not you fall
under the AMT. That’s because you used the loan to improve your property.
If You Made a Profit on Your Home …
If you sold your house for more than you paid, you
technically made what is called a “capital gain.” Usually capital gains are
taxed, but the gain you made on your home—up to $250,000 ($500,00 for married
couples filing jointly)—is exempt from income taxes. You just need to have:
- Owned the property for two years, and
- Lived in it for two out of the last five years before you sold it
If you don’t meet these requirements, all is not lost. If
you had to sell your home because of:
- Death
- Divorce or legal separation
- Job loss that qualifies for unemployment compensation
- Employment changes that made it difficult for you to meet mortgage and basic living expenses
- Multiple births from the same pregnancy
- Damage from a natural or man-made disaster
- “Involuntary conversion” by a local government under eminent domain law, for example
Then the IRS will cut you some slack and only tax your gain
partially. Learn more at the IRS website.
Also, if the gain you made is more than $250,000 (or
$500,000 if you’re married filing jointly), dig around and see if you can find
the receipts for any home improvements you made. That will establish the cost
basis for the home as higher. For example, if you bought your home for $300,000
and made $50,000 in improvements, then sold it for $600,000, you can deduct
that entire amount ($600,000-$350,000 = $250,000). If you hadn’t included those
improvements, you would have been taxed on that extra $50,000 that exceeded the
limit.
This post originally appeared on LearnVest.com on
Feb. 15, 2012 and was written by Alden
Vick
Disclaimer: This information is taken from an original post
on LearnVest.com and the author of this BLOG is not offering legal advice and is
meant as educational information to possible tax exemptions available and All
tax payers should consult with a professional tax consultant or financial advisor
in regards to any tax questions.
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