| Mention taxes, and most people will probably
cringe. Mention tax benefits, however, and you will probably
get a better response. This is another great advantage to
homeownership. Along with being an equity investment,
homeownership can help you save money by offering tax breaks
via certain itemized deductions from your income tax. |
Notable Note: Another reason to
consider buying
If you are renting a home,
you cannot deduct the taxes paid on the property that
you are living in. Even if your landlord raised your
rent to cover the cost of taxes, it doesn't matter. The
tax deduction is only for the property owner who is
actually paying the tax.
| |
| Where Deductions are taken |
| In order to take advantage of homeowner
deductions, you must file Form 1040 and itemize your
deductions on Schedule A . However, if you itemize your
deductions, you cannot take the standard deduction. You may
want to determine which deduction is more beneficial to take.
If the standard deduction exceeds the homeowner deductions,
you may want to claim that one instead. You should consult
your tax advisor for the best way for you to file. |
| What Expenses May be Deductible for
Homeowners |
| • |
Interest paid on a home
loan. Interest that is paid on a first mortgage,
second mortgage, home improvement loan, or a home equity loan
is tax deductible (assuming that you are itemizing deductions
and not claiming the standard deduction). However, there are
some limitations to this. First, the deductions are limited to
a maximum of two mortgaged residences. This may be a primary
residence and one other property, such as a vacation home.
Rental and business properties are not considered in this
limit of two. The next limitation is the amount of the debt.
Your mortgage interest cannot be deducted if your aggregate
mortgage balance is more than $1 million, or $500,000 if
married and filing separately. For home equity loans, you can
deduct interest for loans up to a total of $100,000 (or
$50,000, if married and filing separately) for your main home
and second home, and your Loan-to-value ratio cannot exceed
100%. Your lender should provide you with the annual form 1098
(the year-end interest statement).
|
| • |
Real Estate (or property)
Taxes. Property taxes are what most homeowners in
the US pay for the privilege of owning a piece of real estate.
They are assessed annually by county or local authorities to
help pay for public services. Property taxes on all real
estate, assessed by state and local governments as well as
school districts are fully deductible from income taxes.
|
FYI: Understand how real estate
tax is assessed.
While the method for
assessing real estate differs depending on your state
and municipality, you can use this rule of thumb: You
can expect to pay 1-3% of the market value of your home
in annual property taxes. So if your home is assessed at
$100,000, you may pay between $1,000 and $3,000 a year
in property taxes.
| |
| • |
Discount Points. Points
paid upfront in exchange for a lower interest rate are
generally deductible in the year paid where you have a
purchase mortgage in an amount not exceeding $1,000,000 on a
principal residence. If the points are paid for a refinancing
of a mortgage, the points will be deductible over the life of
the loan.
|
What Cannot be
Deducted
- Closing Costs
- Homeowners insurance expenses.
- Cost of utilities
- Real estate commissions paid to agents
- Depreciation
- Home inspection, appraisal or loan application fees
|
Did You Know?
Low-to-moderate income homeowners may be eligible
for mortgage interest tax credits that are available for
a portion of the interest they pay. The taxpayer must
obtain a "mortgage credit certificate" from state or
local government prior to obtaining the mortgage. The
credit also includes certain limits, but taxpayers may
be allowed to carry forward the unused portion of the
credit for the next three years. Contact your local
government agency for eligibility information.
| |
| Tax Note for Sellers |
If you are worried about the amount of taxes you
may have to pay on any gains from the sale of your home
(capital gains), you may be relieved from paying taxes
If....
- You owned and lived in the house as your main home at
least 2 out of the last 5 years ending with the date sold,
- Your gain was less than $250,000 (or $500,000 married
filing jointly),
- You have not sold another principal residence in the
past 2 years before the sale, and
- You have not depreciated your home while using it in a
business or rental activity.
|
| If you do not meet all of these conditions, then
you may have to pay taxes on part of your capital gain.
Note: This Tax Guide is provided for informational
purposes only, and does not constitute legal or tax advice.
Consult your tax advisor regarding your particular
situation. |
