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Homeowners, unlike renters, can reap a host of tax benefits and deductions (or tax credits) that lessen their costs of housing, and provide enormous tax-shelters and benefits. Here's a look at the top tax advantages exclusively for home-owners.
1. Mortgage Loan Interest: The most sought after of all tax breaks, because interest payments comprise a huge portion of your mortgage payment. Deductible mortgage interest can be taken up to a maximum of $1 million in mortgage debt, secured by a first and second home. Deductions reduce your taxable income against which your taxes due are calculated. Joint filers receive this tax break up to the $1 million mark. Single filers get half the deduction.
2. Real Estate Taxes: Property or real estate taxes are fully deductible and taken on Schedule A. More information here: https://www.irs.gov/taxtopics/tc503.html
3. Capital Gains Exclusion: The Taxpayer Relief Act of 1997 allows taxpayers who file jointly, to keep, tax-free, up to $500,000 in profits on the sale of their principal residence. The amount is halved for those filing single or separately. You can use the benefit as often as you qualify. This is considered as one of the greatest tax benefits or shelters available to all homeowners who meet the requirements. To qualify, tax payers must have occupied the property for two of the prior five years.
4. Home Office Deduction: Home based-businesses that use a portion of the home exclusively for business, may qualify for a deduction of the costs related to that home office. Inclusions are calculated as a percentage of insurance, repairs, utilities, and depreciation. Also, there is no longer any requirement to allocate a home sales' capital gain between the home and the business.
5. Home Equity Loan Interest: Interest on Home Equity Loans are deductible up to the
smaller of $100,000, or the total of your home's fair market value. Again, joint filers receive this tax break up to the $100,000 level, and half for single filers.
6. Home Improvement Loan Interest: The interest on a home improvement loan is also
deductible, but it allows for a 100% deduction providing the upgrades are a "capital improvements" rather than ordinary repairs, maintenance, or cosmetics. The important difference here is that capital improvements always increase a home's value like with an addition. They can prolong the home's life with a new roof, or adapt it to new uses like with handicap modifications. Other examples of capital improvements include building a fence, adding a swimming pool, garage, or porch. Installing built-in appliances, new insulation, or landscaping, or upgrading the heating or cooling systems.
7. Points: Points are charged by mortgage lenders as a part of the loan. You can fully deduct points associated with a home mortgage (does not include a mortgage broker commission). Points paid when refinancing a mortgage loan are also deductible (over the life of the loan - not all at once). Read more on the IRS website: https://www.irs.gov/taxtopics/tc504.html
8. Home Sale Costs: After a home sale, sellers can reduce any capital gain by the amount of their selling costs, including brokerage commissions, title work, legal, advertising, or inspection costs. In addition, costs incurred to make the home or property more saleable can also be deducted (decorating, repairs, landscape, maintenance, etc) if the work was performed
and completed within 90 days of the sale. These costs are simply subtracted or offset from any gains. Gains are calculated by taking the house sales price, minus deductible closing costs and selling costs, minus your tax basis. Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.
9. Moving Costs: If you move due to a change in your job or business location, you may be able to deduct your reasonable moving costs. Deductions include travel or transportation costs and expenses for lodging and storing household goods. To qualify, you must meet meet IRS requirements. Members of the Armed Forces who move due to a change of station, do not have to satisfy the distance or time tests. More information here: https://www.irs.gov/taxtopics/tc455.html
10. Mortgage Tax Credits: A home buying program known as Mortgage Credit Certificates (MCCs) allow qualifying low-income and first-time home buyers, to take a tax credit of up to 20% of the mortgage interest payments on a home (actual amount varies by jurisdiction). This credit is available every year of the loan, while living in the house bought with the MCC. Unlike a tax deduction that reduces your income, the credit is subtracted dollar for dollar, from the income tax owed. The benefit is a much larger tax benefit with the credit.
11. Energy Tax Credits: From time to time congress has authorized homeowners to invest in home energy efficient upgrades to existing homes that are eligible for tax credits. Check here to see what the current green energy credits are: https://www.irs.gov/uac/Cut-Taxes-and-Save-on-Energy-Bills-with-Home-Energy-Credits
If you're thinking of becoming a homeowner someday, I invite you to attend one of my 'home buyer workshops' that explain all of these benefits, including much, much, more.
Michael Dagner is an expert in Denver-Area home sales.
Call today, (303) 514-4000, for help with your home sale or purchase.
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The Michael Dagner Group, Brokers Guild Cherry Creek Ltd, 7995 E. Hampden Ave, Ste 100, Denver, CO 80231 Map
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