Tax laws keep changing, but the tax breaks for homeowners have remained….for now anyway. Make sure you take advantage of them!
1) Mortgage Interest
Your biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. And all of that interest is deductible, unless your loan is more than $1 million.
But interest tax breaks don’t end with your home’s first mortgage. Did you decide to get a home equity loan or line of credit? Generally, interest on equity debts of $100,000 or less is fully deductible.
What if you’re the proud owner of multiple properties? Mortgage interest on a second home also is fully deductible (subject to the same $1 million limit). And did you know your additional property doesn’t have to be a house? It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities and is your principal or second residence. You can even rent out your ‘second residence’ for part of the year and still take full advantage of the mortgage interest tax deduction as long as you spend a specified amount of time there.
But be careful. If you don’t vacation at least 14 days at your second residence, or more than 10 percent of the number of days that you do rent it out (whichever is longer), the IRS could consider the place a residential rental property and ax your interest deduction.
Did you pay points to get a better rate on any of your various home loans? They offer a tax break, too. The only issue is exactly when you get to claim them.
The IRS lets you deduct points in the year you paid them if, among other things: the loan is to purchase or build your main home; payment of points is an established business practice in your area; and the points were within the usual range. Make sure your loan meets all the qualification requirements to be able to fully deduct the points in the year paid.
A homeowner who pays points on a refinanced loan is also eligible for this tax break, but in most cases the points must be deducted over the life of the loan.
The same rule applies to home equity loans or lines of credit. When the loan money is used for work on the house securing the loan, the points are deductible in the year the loan is taken out. But if you use the extra cash for something else, such as buying a car, the point deductions must be parceled out over the equity loan’s term.
And points paid on a loan secured by a second home or vacation residence, regardless of how the cash is used, must be amortized over the life of the loan.
Tax Breaks for Homeowners
The other major deduction in connection with your home is property taxes.
A big part of most monthly loan payments is taxes, which go into an escrow account for payment once a year. This amount paid from escrow for taxes should be included on the annual statement you get from your lender, along with your loan interest information. These taxes will be an annual deduction as long as you own your home.
But if this is your first tax year in your house, dig out the settlement sheet (aka HUD) you got at closing to find additional tax payment data. When the property was transferred from the seller to you, the year’s tax payments were divided so that each of you paid the taxes for that portion of the tax year during which you owned the home. Your share of these taxes is fully deductible.
Property taxes must be deducted as an itemized expense on Schedule A.
4) When You Sell
Up to $250,000 in sales gain for an individual ($500,000 for married, filing jointly) is tax-free as long as the homeowner owned the property for at least two years and lived in it for any two of the five years before the sale (doesn’t need to be two consecutive years, in fact can be 24 separate months over the previous five years!)
What happens if you don’t meet those requirements? The IRS provides some tax relief if the sale is because of a change in the owner’s health, employment or unforeseen circumstances. In these cases, the tax-free gain amount is prorated.
Be sure to take advantage of the tax breaks for homeowners. Call (919-225-2814) Stults Advantage today and we can help you navigate the process.