Glenn Musto | Thursday, October 13, 2016. As the housing market continues to improve across the United States, more and more people are buying homes. But…are there significant financial benefits to owning Vs renting your home? Absolutely. One major advantage is that you can reduce the amount of taxes you will owe at the end of the year. Tax breaks are available for any home, be it a mobile home, single-family residence, town house, condominium or co-op apartment.
Regardless of whether you are a first-time or longtime homeowner, it will be easier for you to take advantage of every tax deduction and/or tax credit at your disposal by keeping good records throughout the year. In order to receive all the tax breaks provided by home ownership, you must itemize your taxes. This means completing Form 1040 and Schedule A, where you can detail your tax-deductible expenses.
NOTE: The author is not a tax attorney, CPA, or tax expert of any kind. The following represents my opinion as a professional Realtor. Please check with your personal tax advisor regarding the information that follows.
Tax savings that are generally available to homeowners:
1. Mortgage Interest. The ability to deduct the amount of interest paid on your mortgage is typically the greatest savings for homeowners. In the early years of your mortgage, the lion’s share of your monthly payments is applied toward interest on your loan rather than reduction of principal. Unless your mortgage is for more than $1 million, mortgage Interest is fully deductible from state and federal income taxes. For amounts greater than this, the IRS limits the amount you can deduct.
What if you have a mortgage on more than one property? Mortgage interest on a second home is also deductible. Further, the other properties are not restricted to houses. They include boats or RVs that provide cooking, sleeping, and bathroom facilities. You can even rent out your second property for part of the year and still take advantage of the mortgage interest tax deduction as long as you also spend some personal time there. This personal time must include at least 14 days, or greater than 10% of the number of days that you rent it out to others. Otherwise, the IRS will consider the place a residential rental property and disallow your interest deduction.
2. Mortgage Insurance Premiums: When your mortgage represents 80% or more of the total cost of your home, your lender will require you to carry some form of mortgage insurance. Such insurance protects the lender against a possible default on your loan. After you have reduced your mortgage so that it represents 20% or greater equity in your home, this requirement typically goes away.
Meanwhile, if your adjusted gross income is less than $100,000 for a married couple filing jointly, or less than $50,000 if married and filing separately, you should be able to deduct the full amount that you paid for mortgage insurance.
3. Interest on home-improvement loans: The IRS considers the interest on a home-improvement loan fully deductible, up to $100,000 in debt. Interest paid on a home equity line of credit (HELOC) is also tax-deductible. Any portion of a home loan greater than 100% of the value of the property does not qualify for a deduction.
4. Tax Credits for Energy Star Products: A tax credit is more valuable than a tax deduction because a tax credit offsets what you owe in taxes, dollar for dollar. For example, if you owe $500 in federal taxes and claim a $100 tax credit, you would be required to pay only $400 in taxes.
In order to take advantage of the Energy Star tax break, you must install approved energy efficient equipment like storm doors, energy efficient windows, insulation, air-conditioning and heating systems at your primary residence before the end of the year. Your tax credit equals 10% of the cost of the products. The maximum deduction allowed for windows and skylights is $200, and the maximum for doors is $500. Labor costs for Installation are not deductible. Be sure to save all receipts and Energy Star labels for any qualified improvements you make on your home. There are also quite a few tax deductions for home improvements that qualify as “green energy” products. The credit is scheduled to expire on Dec. 31, 2016. Confirm the expiration date online.
5. Renewable-energy tax credit: According to the Solar Energy Industries Association, 600,000 American homeowners have added residential solar equipment since 2010. If you have installed equipment that uses renewable sources of energy, such as sun and wind to help power your home, you may be eligible for the Renewable Energy Efficiency Property Credit. For equipment placed in service by the end of 2016, this tax credit can equal 30% of the cost of the equipment, including installation.
6. Points: Points on a mortgage refers to fees paid to your lender in order to obtain the mortgage on your home. The IRS considers points to be prepaid interest, wherein one point equals 1% of the principal loan amount. For a first mortgage on your primary residence, these charges are deductible in the tax year they were paid. Points are deductible over the life of the loan when a home is refinanced. Points paid on a loan for a second home or vacation residence must also be amortized over the life of the loan.
7. Property Taxes: State and local property taxes based on the assessed value of real property are deductible. When you pay your property taxes directly to the tax assessor, you must provide records with your tax returns that prove the amount paid. When your property taxes are paid as part of your monthly payment through an escrow account with the lender, this information appears on Form 1098.
8. Interest on Construction Loans: If you took out a construction loan to build a home, you may deduct the interest paid on the loan. This deduction is only available for the first 24 months of the loan, even when construction takes longer.
9. Ground Rent: When the former owner still owns the land under your house after you’ve bought it, and you “rent” the ground from that owner, doing so reduces the cost of the home since you’re not buying the land. The IRS gives you a break for this situation. “Ground rent” amounts can be deducted so long as the lease is for more than 15 years and you have been paying the rent monthly or annually. However, if your payments are designed to purchase the land, that payment is not deductible.
10. Income and interest on reverse mortgages: Reverse mortgages are considered a loan advance rather than income, so the amount received is not taxable. The interest accrued on a reverse mortgage is also not deductible until the loan is paid off. The result is that you cannot take an annual deduction for interest as you might with traditional mortgage interest.
11. IRA Withdrawals: First-time home buyers may withdraw up to $10,000 from their traditional IRA (and even Roth IRAs) penalty-free to help with the purchase of their home. Your spouse, a parent, child, or grandchild can add another $10,000 from their own IRA accounts, for a total not to exceed $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, is not tax-deductible.
12. Capital Gains Exclusion: For many, the capital gains exclusion is the most significant tax benefit enjoyed by homeowners. This exclusion can be used more than one time, but not more than once every two years. To explain further, homeowners may exclude from taxable income up to $250,000 ($500,000 for joint filers) of capital gains on the sale of their home if they have maintained the home as their principal residence in two out of the preceding five years, and they have not have claimed the capital gains exclusion for the sale of another home during the previous two years. This means that no tax whatsoever is due on profits up to $500,000 (filing jointly) when you sell your home.
Unlike taxable returns on most investments, one significant return on home ownership—what economists call “imputed rent”—is excluded from taxable income. That is, while you are living in your home “rent-free,” the IRS does not consider this savings that you are receiving as taxable income. In contrast, landlords must count as income the rent they receive, and renters may not deduct the rent they pay. A homeowner is effectively both landlord and renter, but the tax code treats homeowners the same as renters, while ignoring their simultaneous role as their own landlords.
While saving thousands of dollars in deductions is marvelous, it’s only part of the benefit you receive as a homeowner. Once you own your home, you establish predictable monthly housing costs without rent increases subject to the whims of someone else. You also have the security of knowing that you own a valuable asset. Such an asset should retain its value for many years into the future, and could be sold at any time, should you ever need the cash.
We are fortunate in our Pinellas area of Florida to have homes of all types available, in many different areas and many price ranges. Buyer demand is currently quite strong in Clearwater Beach, Sand Key, Belleair and Belleair Shore, Indian Rocks Beach, Indian Shores, North Redington Beach, Redington Beach, Madeira Beach, Treasure Island, St Pete Beach, Pass-a-Grille, Tierra Verde, and St Petersburg, FL. While more condominium units are generally available, we still have an enviable selection of single-family homes in our beach areas.
If you are thinking of selling your home in any of these areas within the next three to six months – single family or condominium – you’d be wise to find out its true market value today to help with your decisions.
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Team Musto has qualified buyers waiting right now to purchase your home – single family home or condominium.
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