Two things are certain in every American’s life…Death and taxes. Now that 2016 is in full swing, tax time is upon us. Tax preparation is such a dreadful time of year; however, one that is necessary.
If you have purchased a home in 2015, Congratulations! If you have sold your home in 2015, Congratulations! There are several tax deductions available to homebuyers and home sellers.
INTEREST
You are allowed to deduct all of your mortgage interest payments on any mortgage up to $1 million if you are married or filing jointly. Married filing separately can deduct up to $500,000. PMI premiums are tax deductible. You can treat amounts you paid during 2015 for qualified mortgage insurance as home mortgage interest. Some are able to deduct some equity interest (line of credit) from their 1040. The IRS limits the amount of debt that can be treated as Home Equity for tax deduction. A Home Improvement Loan interest can be deducted as well. The home improvement cost cannot be deducted. If you have sold your home and the home improvements were made within 90 days of closing, then the improvements will be considered selling costs and selling costs are deductible.
POINTS
The point system is one thing that many people find hard to comprehend. Points are considered a form of interest. The points can be fully deducted if they are associated with a home purchase. One point equals 1% of the loan principal and is paid at closing. Fees are included on the IRS income tax deductions list. If you are refinancing, points are still fully deductible but must be done so over the life of the loan only, not up front.
ENERGY CREDITS
If you purchase a home in 2015 it is a great idea to outfit the home in energy efficient systems. You can write off 30% of the cost as part of the Residential Renewable Energy Tax Credit. What are energy efficient systems? They include geothermal heat pumps, solar panels and water heaters, fuel cell property, and small wind-energy property. There are no maximum credit limits for qualifying items with the exception of fuel cell property which has a $500 per kilowatt limit.
SELLING YOUR HOME
You generally need to report the sale of your home on your tax return, but some home sellers don’t have to report the sale of the home to the IRS. This depends on how long you owned and lived in the home before the sale and how much profit was made on the transaction. If you owned and lived in the home for two out of five years before the sale, then up to $250,000 of profit is tax-free. If you are married and file a joint tax return, up to $500,000 of profit is tax-free. If your profit exceeds the $250,000 to $500,000 limit, the excess is reported as capital gain on Schedule D. Of course, there are special rules for full or partial exclusions for special circumstances such as divorce settlement and death of a spouse. If you have had to sell your home due to relocating for work, you may be able to deduct some of your moving expenses. Moving expenses would include transportation costs, travel to the new place, storage costs and lodging costs.
REAL ESTATE TAXES
Homeowners pay real estate taxes to local and state entities. These property taxes can often be deducted in the year which they are paid. If you have an escrow account for your taxes and insurance, your mortgage lender will send an annual statement which you can file with your federal tax returns.
HOME IMPROVEMENTS
Certain types of home improvement projects can be tax-deductible. Home improvements made for medical reasons are tax-deductible. If the home renovations made do not add to the overall value of the home, then the costs are typically 100% tax-deductible. The costs made for aesthetic purposes are not tax-deductible.
HOME OFFICES
Homeowners who work from home can typically deduct the expenses of maintaining a qualified home office. An office is generally a separate room or group of rooms, but it can be a section of a room if the division is clear with a partition or something similar in place. It must show that personal activities are excluded from the business section. A qualified home office must be used regularly and exclusively for conducting business. However, if you let your children use the office to do their homework, you violate the exclusive-use requirement and forfeit the chance for home office deductions. This does not mean that you cannot make a personal phone call from the office or that family member cannot step into the room. It just means that personal activities must not interfere with the office space no more than would be permitted in a traditional office building. Costs to repair and maintain the business space is tax-deductible.
As you can see, there are several tax breaks out there for homeowners and also for selling your home. Tax laws change frequently. Consult your tax professional for more in depth information and help recouping some of the costs of owning your home.