Tax Benefits of Home Ownership – Part 1
I wanted to pass on some tax ideas and topics for all to consider. I recently ran across some excellent info from FoxBusiness.com, but I remind everyone to stay abreast on the latest tax news. New administrations and Congresses are constantly changing the tax structure in this country, and unless you’re a working CPA, you’re probably not completely up to speed on the latest changes. These can have a significant impact on your real estate, both primary residences and investment properties.
There are many benefits and rewards of owning a home as either your primary residence or as an investment. But many folks overlook the fact that owning a home could mean you qualify for tax breaks. Although you’ll likely need to itemize your taxes in order to take advantage of these deductions, the benefits may far outweigh the complications of the tax forms.
Following are some of the tax breaks and areas you’ll want to look at.
Mortgage Interest Paid at Settlement
Your closing statement should list your home mortgage interest. On a mortgage of up to $1 million, you can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). This amount should be included in the mortgage interest statement provided by your lender.
If you paid points on your mortgage, these fees are included on the income tax deductions list and can be deducted as long as they are associated with the purchase of a home. If you refinanced your home, these points are still deductible, but it must be done over the life of the mortgage.
If you sold a home in the past year, you may be able to reduce your income tax by the amount of your selling costs. These costs can include things such as repairs, title insurance, advertising expenses, and broker’s fees. The IRS only allows the deduction of repair costs associated with selling if the repairs were made within ninety days of the sale. It’s also crucial that the repairs were made with the intent of improving your home’s marketability. Selling costs are deducted from your gain on the sale.
If you use a portion of your home exclusively for the purpose of an office for your small business, you may be able to claim a deduction on your taxes for costs related to insurance, repairs, and depreciation. You may only claim this deduction if the space within your home is used exclusively and regularly as either your principal place of business or a place where you meet and deal with customers or patients. You may also be able to take advantage of this deduction if a portion of your home routinely is used for storing items (product samples, inventory, and so on) used in your business.
Mortgage Insurance Premiums
You may be able to deduct the premiums paid for private mortgage insurance for your principal residence and for a non-rental second home. The deduction begins to phase out once your adjusted gross income reaches $100,000 ($50,000 for married filing separately). In general, you can deduct the premiums paid for the current tax year only.
Home Improvement Loan Interest
If you’ve taken out a loan to make improvements to your home, the interest may be deductible. The loans must be for capital improvements to your home, meaning they must increase your home’s value, adapt it to new uses, or extend its life. New carpeting or painting are not considered capital improvements, while adding a garage, installing a water heater, or building a deck are all examples of capital improvements.
Construction Loan Interest
If you take out a construction loan to build a home, you may qualify to deduct the interest. The IRS only allows a deduction for mortgage interest if the loan relates to a qualified home, which means it must either be your principal residence or a vacation home that you will use for personal purposes. You can only use this deduction for the first twenty-four months of the loan, even if the actual construction takes longer.
We recommend you consult the IRS website for information concerning deductions and credits, and consider meeting with a tax professional to ensure you’re not missing any deductions for which you’re eligible.