These 9 Tax Breaks Can Help Make Homeownership More Affordable

Dreaming of owning a home? Here are the nine most common tax breaks for homeowners.

Ben Franklin said, “nothing is certain except for death and taxes.” And every year around this time we’re reminded of the unfortunate truth of his words. But let’s look at things positively: If taxes are inevitable, so are tax breaks.

Pluses and minuses of taxes can be compared to home ownership — the joys ebb and flow. On one hand, it feels great to be one rung higher on the American Dream ladder. But the increased responsibility and costly home repairs can be a mood killer. Sure, it’s a blast hosting a dinner party or building a dynamite basement bar for football games. But the monthly mortgage fees and property taxes add up quickly.

Luckily, there’s a silver lining that appears every February. The IRS gives us a list of individual tax breaks that make owning a home more affordable. The fine print on deductions can get pretty lengthy, so we’ve filtered out the jargon and summarized the most common tax breaks for homeowners.

9. Mortgage Interest

Mortgage interest is anything you pay on a loan for your home. If you own a home (or second home), you can usually deduct the interest you pay on your mortgage. Examples of these loans could be:

  • A mortgage to buy your home
  • A second mortgage
  • A line of credit
  • A home equity loan

Mortgage loan deductions are not applicable for any third, fourth or any home beyond your second. Also, there are limits to these deductions — $1 million to be exact — or $500,000 if married but filing separately.

8. Property Taxes

Property tax, or real estate tax, is one of the most common and straightforward tax breaks for homeowners. Whether you live in Hawaii with a real estate tax rate of .27% or New Jersey with an astronomically high rate of 2.35%, you can deduct the property taxes you paid for the year. Simply include this on IRS Form 1040. Bear in mind this applies solely to properties for personal use, not rental or business properties.

Want to know whether it’s worth it to claim this deduction every year? One personal finance site calculated that on a $179,000 home (the average price of a home in 2015) you could pay as little as $487 in annual taxes in Hawaii or $4,189 in New Jersey. That’s a good chunk of change for a deduction.

7. First-Time Homebuyers

Uncle Sam allows first-time homebuyers to bend the IRA rules to help you fulfill your home-owning dreams. In fact, you can withdraw up to $10,000 from your traditional or Roth IRA without penalty to help with the purchase of your new home. The only stipulation is the money withdrawn must be used toward buying, building or rebuilding the home, or for settlement costs within 120 days.

Even better, the IRS’ definition of “first-time homebuyer” is more broad than you might think. You qualify if you or your spouse did not own a home at any time during the past two years.

6. Selling Your Home

If you’ve sold a home and moved to another location, you qualify for several new deductions. Taxpayers can keep up to $250,000 ($500,000 if married but filing separately) in capital gains, courtesy of Uncle Sam.

To deduct moving expenses relating to your sale, you must meet three criteria:

  • You moved at least 50 miles from your old home or job location.
  • The move date must relate closely to the start of your new position.
  • You meet certain time test requirements in the new position.
  • Time tests vary for those who are self-employed, but the minimum time worked must be at least 39 weeks during the first 12 months. Expenses, such as lodging, transportation and storage are all tax deductible if you meet these qualifications.

It’s also worth noting that members of the armed forces are not subject to these time parameters if your move relates to a military order.

5. Owning a Second Property

Thinking about purchasing a vacation home or income property? If you use your second home for personal use, deductions, such as mortgage interest, property taxes and home office are still applicable.

If the second property generates rental income, the rules are a bit different depending on how often you use it as the homeowner. You can deduct rental expenses, such as insurance premiums and fees paid to property managers, only if your personal use was more than 14 days or 10% of the total days rented.

4. Home Improvement Updates

Did you remodel the kitchen or install a new HVAC system this year? Keep track of capital improvements, or improvements that increase your home’s value, as they come in handy when you sell the home. If your home sells for more than you paid for it, that extra money can be considered taxable income at capital gains rates (note the $250,000 or $500,000 exclusion).

But before you go all Bob the Builder on your home, know that general home repairs are those deemed necessary for your home to stay in good condition. So no, you can’t deduct the cost of fixing a leak or patching a roof.

3. Energy Credits

Speaking of updates, the government also likes to reward taxpayers who make energy-efficient improvements to their homes. In fact, the IRS offers a credit of 30% for taxpayer expenditures that include solar hot-water heaters, wind energy and geothermal heat pumps. Think of it as saving the planet and padding your wallet at the same time.

2. A Home Office

These days, freelancing and working remotely are more than just a pipe dream for some Americans. Luckily, the IRS lets you deduct certain expenses related to your in-home business, including rent, utilities and repairs.

Not every home office is eligible, though. Your home office must be your primary workspace, and the spot must not serve dual a purpose in your home; it can’t also be a guest room.

After deciding on eligibility, choose either the simplified or regular method to determine your deductions. Rather than painstakingly recording and calculating your expenditures, try simplifying things by using a standard deduction of $5 per square foot of home used for business (with a maximum of 300 square feet).

1. Home Equity Loans

Similar to the mortgage interest breaks discussed earlier, homeowners can also receive a tax break on home equity loan interest. Did you take out a loan to consolidate debt, make home repairs or buy a car? Maybe you needed a better solution to pay your college tuition. As long as that debt, the car or your schooling is less than $100,000, you’re good to go. Note that this deduction only applies to first and second homes.

The waters can get murky when diving into the nitty-gritty of homeowner tax deductions. If you find yourself lost in the sea of IRS stipulations, consider contacting a tax professional who will ensure accurate filing and the biggest return. Whether you file on your own or hire a pro, make sure it gets done correctly. Appreciating a big tax return feels a whole lot sweeter when sitting on the back porch of your own home rather than in the audit hot seat.

This article originally appeared on The Cheat Sheet.

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8 Tax Breaks Most Homeowners Don’t Realize They Can Get

Whether you're a new homeowner or you've been in your house for years, you may want to find out if you qualify for these tax deductions for 2016.

It’s tax season again, and if you bought a new home in 2016, you want to be sure you don’t miss out on one of the numerous tax deductions you could be eligible for. Even if you aren’t a new homeowner, there could be some deductions you might not be aware of that can help you maximize your tax refund.

We spoke with Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. He reviewed some of the tax deductions home owners should be aware of as they begin working on their tax returns.

1. Mortgage Interest

“In 2016, the IRS acquiesced in the Ninth Circuit Voss case, which changes the way the mortgage interest deduction is calculated,” Luscombe said. “The IRS now says it is allowed on a per taxpayer rather than a per residence basis.”

That means that, if you own a home with an unrelated taxpayer, you are now each entitled to a mortgage interest deduction of up to $1 million of mortgage principal for funds used to purchase, construct or improve a home and an additional $100,000 of principal for a loan secured by the home but where the funds are used for other purposes.

“This also creates another marriage penalty in the Tax Code since, if the two taxpayers get married, then they are just entitled to a mortgage interest deduction up to the $1.1 million limit,” Luscombe added.

2. Mortgage Insurance Premiums & Debt Forgiveness

The deduction for mortgage insurance premiums expired at the end of 2016 but is still available for 2016 tax returns. Likewise, the exclusion for mortgage debt forgiveness also expired at the end of 2016 but is still available for 2016 tax returns.

“In order to try to better determine if taxpayers are claiming the proper amount of mortgage interest deduction, mortgage lenders are now required to report on Form 1098 not only the mortgage interest received for the year but also now the principal amount of the mortgage, the date the mortgage originated, and the address of the property,” Luscombe said. So be sure to download or request a copy of your Form 1098 if you haven’t already received one in the mail.

3. Energy-Related Tax Deductions

There are two energy-related tax breaks that homeowners can qualify for.

  • The nonbusiness energy property credit expired at the end of 2016 but is available for 2016 tax returns.  This credit is a $500 lifetime credit for improvements such as energy-efficient windows, doors, insulation and roofs, as well as certain home systems.
  • There is also a residential energy efficient property credit for items such as solar and wind installations that currently extends through 2021 but is subject to phase-downs over its final years.

4. Capital Gains Exclusion

If you’ve owned and lived in your principal residence for at least two of the last five years, then the exclusion for gain on its sale remains available. The exclusion is up to $250,000 of gain for a single taxpayer and up to $500,000 of gain for joint filers, Luscombe said.

5. Inheritance of Property

When you inherit an asset, the cost basis of the asset is “stepped up to value” on the date of death, which helps you avoid capital gains taxes on that property. Here’s how it works: Let’s say your grandfather just died, leaving a home to you and your siblings. The home is valued at $500,000 at the time of your grandfather’s death, but the original price paid for the home, the basis, when he bought it 30 years ago was $100,000. While you and your siblings may have to pay estate or inheritance taxes depending on the size of the estate, you won’t have to pay capital gains taxes on $400,000 in gains on the house.

“Stepped-up basis on death remains available for a principal residence, as well as other taxpayer assets on death,” Luscombe said. “However, with discussions about eliminating the estate tax and shifting to carryover basis, it is not clear how much longer current law will remain in effect. Stepped-up basis means that the inheritor of the residence who then sells the residence would likely have minimal taxable gain because their basis would be stepped-up to the date of death value of the residence.”

6. Property Taxes

Currently, real estate taxes with respect to a residence may also be deducted, although tax reform proposals being discussed in Congress would eliminate that deduction.

7. Home Office Expenses

If you use part of your home for business operations, you may be able to deduct some of your business expenses. The home office deduction is available for homeowners and renters, and applies to all types of homes, according to the Internal Revenue Service, which provides details and a full explanation of the requirements to claim this deduction on its website.

8. Moving Expenses

If you moved because you changed jobs or your business relocated, or if you started a new job or business, you may be eligible to deduct your moving expenses. The IRS explains that you must meet the following criteria in order to qualify.

  • Your move closely relates to the start of work
  • You meet the distance test
  • You meet the time test

Again, you can find a full explanation of these criteria on the IRS website. And for more answers to all those question bound to pop up between now and April 15, check out our tax learning center.

Image: Portra

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