Don’t forget about homeowner tax breaks
A New Year means tax season is right around the corner. One of the many perks of homeownership is big tax breaks. So whether you’re doing your taxes yourself or getting help from a professional, it’s important to take advantage of those breaks!
Mortgage Interest Deduction:
Before buying a home, a standard deduction may have made the most sense when you prepared your taxes. But homeowners can deduct the interest portion of their mortgage payments, and the earlier you are in your mortgage, the greater the percentage of each payment that goes toward interest, so take advantage right away!
There are specific criteria that have to be met in order to deduct home office expenses, but it can lead to a very large deduction. In general, your home office has to be used specifically for business purposes. Check with a tax professional to see if your home office qualifies for a deduction—it’s a little extra work, but can make a big difference in your tax responsibility.
Points on home mortgage and refinancing
if you bought a home in 2015 with a mortgage, then in addition to the mortgage interest (which may not be a lot if you bought late in the calendar year), you can probably write off the points (both origination and discount points) on your tax return, says Jackie Perlman, principal tax research analyst at H&R Block (HRB). One point is equal to 1% of the principal loan amount. That’s because the IRS considers points to be prepaid interest. The challenge is whether you’re eligible to deduct the points all at once, or whether you have to spread the costs out over the life of the loan. Generally, if you bought your first home or got a loan on that first home, you can take the deduction all at once, the IRS says. For a second home, and often for a refinance on a first home, the IRS says you most likely have to spread it out. “You have to meet all the criteria in order to deduct them up front, otherwise you have to amortize them over the life of the loan,” she said. A good place to start, she says, is the IRS Tax Information for Homeowners guide.
Interest on home-improvement loan
The IRS considers the interest on a home-improvement loan fully deductible, up to $100,000 in debt. In addition, interest paid on a home equity line of credit (HELOC) is also tax-deductible. However, as Greg McBride, chief financial analyst with Bankrate.com, notes, any portion of a home loan that is over 100% loan-to-value (meaning the loan is worth more than the value of the property) isn’t deductible.
Energy-efficiency tax credit
If you made efforts in 2015 to make your home more energy efficient by installing equipment like storm doors, energy efficient windows, insulation, air-conditioning and heating systems, the IRS wants to give you a tax credit of $500, though only $200 of that can be used for the windows. The credit however is set to expire on Dec. 31, 2016.
Renewable-energy tax credit
If you’ve installed equipment that uses renewable sources of energy, such as the sun and wind, to help power your home, you may be eligible for the Renewable Energy Efficiency Property Credit. You are eligible for this tax credit up to a whopping 30% of the cost of the equipment, installation included, so long as the equipment is placed in service by the end of December 2016. About 600,000 American homeowners have added residential solar equipment since 2010, according to the Solar Energy Industries Association.
Ground rent or land lease
There are rare situations in the U.S. for homeowners where the original owner still owns the land under your house after you’ve bought it, and you own the aboveground property and “rent” the ground from the owner. The “ground rent” option reduces the cost of the home since you’re not buying the land. The IRS lets you get a break for this situation and thus “ground rent” amounts can be deducted if you have been paying the rent monthly or annually, so long as the lease is for more than 15 years. However, if you’re making a payment to capitalize the ground rent, to buy out the lessor’s interest to get out from under it every year, that payment isn’t deductible, the IRS says.
Income and interest on reverse mortgages
The IRS considers reverse mortgages as a loan advance not income, so the amount you receive isn’t taxable. But the interest accrued on a reverse mortgage isn’t deductible until the loan is paid off, so you can’t take a deduction each year for the interest as you might with the traditional mortgage interest you pay.
Buying a home
The IRS allows first-time home buyers to withdraw up to $10,000 from their traditional IRA (and even Roth IRAs) penalty-free to help with the purchase of the home. Your spouse or even a parent, child, or grandchild can kick in another $10,000 from their IRA accounts, for a total of up to $20,000. You can also borrow half of your 401(k) balance up to $50,000 for the purchase of a home. But, the interest you pay on that 401(k) loan, unlike a mortgage loan, isn’t tax-deductible.