The Top Ten Homeowner Tax Deductions

Lets Take a Fresh Look at the
Shifting Tax Terrain for Homeowners

As the time for filing income tax returns nears, we should take a fresh look at the shifting tax terrain for homeowners. Each tax year, the dynamic character within Washington, D.C. differently effects the tax breaks set forth, rescinded, altered, and extended for home owning taxpayers.

We can thank the hard work of many groups in the real estate industry which includes the National Association of REALTORS®, for many tax advantages that homeowners have the benefit of which were scheduled to be cut during the past several months have been preserved and extended until the end of the 2013 tax year. Disclaimer This information is only intended to be a summary of present day tax concerns in the news. If you require advice on tax matters, please contact a CPA or tax attorney.

1. Deduction For Mortgage Interest The deduction for mortgage interest has always been homeowners favorite tax benefit in the United States. The monthly mortgage payments for new homeowners are almost all interest during the first several years. Having the capability to deduct this interest can produce a sizeable decrease in tax liability. First-time home buyer affordability is directly tied to their capability to deduct interest paid on their mortgage. Homeowners itemizing their tax deductions can subtract interest that is paid on a real estate mortgage having a balance as high as $1 million. While there has been some movement to put a limit on total itemized deductions taxpayers take having higher incomes (those above $400,000), the present deductions include all tax brackets. American homeowners save about $100 million each year by taking mortgage interest deductions on their annual tax returns.

2. Deduction for Private Mortgage Insurance
Homeowners who pay less down than 20 percent typically pay some type of Private Mortgage Insurance. or PMI (typically abbreviated as MIP or plain MI), may be just a few dollars up to the hundreds of dollars each month, while it is a big part of many homeowners’ monthly mortgage payments. For mortgages originated subsequent to Jan 1, 2007, while you also have a PMI, it may be a deduction on taxes. This deduction phases out, at 10 percent for each $1,000, with taxpayers having a gross adjusted income ranging between $100,000 to $109,000 while those with incomes above that range do not qualify at all. This tax deduction extension for the 2013 year was one of numerous last-second tax rescues by supporters in the real estate industry .

3. Deduction For Interest on Home Improvement Loan
The interest for home equity loans taken out for "capital improvements" made to your home may also be deduced for taxes. For loans having balances as high as $100,000, this interest is also tax-deductible when a homeowner uses this loan to make home improvements such as upgrading the components or adding square footage, to the home, or fixing damage resulting from natural disasters. Routine maintenance items such as painting or changing the carpet in a home are typically not capital improvement projects.

4. Deduction For Mortgage Points/Origination Fees
Homeowners that paid points when purchasing their home or when refinancing can typically deduct on their income tax returns, those points paid . Points, typically called origination fees, often fees based upon a percentage a mortgage lender charges to make a mortgage loan. A fee of one percent for a $100,000 mortgage loan is one point, or in this example $1,000.

For a home purchase mortgage, taxpayers can deduct a;; of these points which they paid during the same year. For a refinance loan, any points deducted must be amortization over the entire loan life . Many taxpayers do not remember this amortized allowance over time, making it essential to keep accurate records for deduction of points paid on a refinance.

5. Deduction for Profit on Real Estate Sale If you have sold a home during the past year, then you are most likely aware that an individual can claim as much as $250,000 profit from a sale free of tax, while married couples are able to claim as much as $500,000 free from tax. Naturally, there are a few requirements to escape any tax of capital gains on any profit.

The home needs to be the a primary residence. You must have resided in this home, which was your primary residence, during two of the preceding five years. You could have rented it out during years one, two, and five, and occupying it for years three and four. Using this method, a homeowner might potentially claim as tax break on more than one home during a somewhat short time frame, although every tax-free sale needs to occur a minimum of two years from one another over any prior tax-free sale.

6. Deduction for Upgrades/Repairs of Energy Efficiency
Homeowners may deduct the expense of construction materials used for upgrades to energy efficiency in their home. It is in reality a tax credit, a credit that may be used as an absolute reduction to the amout of taxes owed, not a simple reduction to your taxable income. As much as 10 percent of an entire expense for energy-efficient building materials may be used for a tax credit, to a $500 maximum of credit. Doors, Insulation, new roofs, and numerous other items may qualify for this energy efficiency credit. In addition, there are individual limits for specific items, such as $200 for windows,, $150 for furnaces, and $300 for heat pumps and air conditioners.

7. Deduction for Selling Cost of Real Estate
For those who are lucky enough and their profits on selling their home might be above the $250k/$500k limit, some ways still exist to diminish the tax liability. Costs associated with selling a home can be considerable, and those costs in themselves may be claimed for tax deductions.

By totaling all of the capital improvements spent on the property while you were the owner, all the closing fees you paid, marketing costs required in selling the home and money spent making repairs to property damage, can add a substantial amount of money to your home's cost basis. In essence it increases the original purchase of the home. Your cost basis starts out with the initial amount you paid for your home, and subsequently adds any improvement and sales expenses. This new cost basis is then compared to the sales price which substantially reduces your taxable gain on the home.

8. Deduction for Home Office
The tax deduction of a office at home is often mentioned as a deduction which increases your chances of being audited. Although the raw figures might show some credibility to such an assessment, it’s actually the way in which a home office gets deducted that gets a few taxpayers into audit punishment.. When this deduction is properly used, it is just as sound as any other. Homeowners may deduct a percent of their utilities, mortgage, and repair bills using a direct relationship to the space of their house that is being dedicated as office space.

A few fast and hard rules exist that you must live by when you deduct the costs of a office at home. The home office needs to be your main business place (the main office location as a place where you do the preponderance of your work). It must be used exclusively for business purposes (it can not be your kitchen during the day and your office at night). You must be realistic about its use and size (unless you really like audits).

9. Deduction for Property Tax
Often new homeowners don’t realize that the taxes they pay on their property are deductible. While it may appear odd to see a tax-deduction tax, the overall result is that you do not have to pay income taxes on money you spent for property taxes. Homeowners need to be careful that they only deduct the actual amount of property taxes paid to the local tax collector during the year. This may not necessarily be the amount paid to an escrow account, and must not encompass any other city or county fees which might potentially be included on the same property tax bill.

10. Deduction of Loan Forgiveness The 2007 Mortgage Debt Forgiveness Relief Act was initiated as short sales became a new and expanding portion of the overall real estate market. An upside down homeowner might get their mortgage lender to accept a $110,000 short sale for their home, when they actually have a $160,000 mortgage balance. Even though the lender might forgive the excess $50,000 due subsequent to participating in a short sale, the federal government sees it as a taxable income of $50,000 (a money gift from the mortgage lender direct to the mortgage borrower).

This Debt Forgiveness Act relieved the taxpayer temporarily of such burden, however was expiring this year. Through considerable effort, it was continued this year along with several additional measures for homeowner tax relief and homeowners may continue to take advantage of this tax relief for the 2013 tax year. Disclaimer suggested by the IRS: To the extent that this message or any attachment concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. This message was written to support the promotion or marketing of the transactions or matters addressed herein, and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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