Top 10 Homeowner Tax Breaks
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Your home offers a score of
tax deductions and credits designed to help offset the cost of housing and to
keep the housing market fueled with new buyers.
Here's a look at the Top 10 Tax
- Mortgage Loan Interest: The Mother Of All Tax Breaks, because interest
payments comprises a large portion of your mortgage payment in the early
years of the loan's term, mortgage interest on a maximum of $1 million in
mortgage debt secured by a first and second home is deductible. Deductions
reduce your taxable income against which your taxes due are calculated. The
$1 million level applies to joint tax filers. You get half the deduction
if you file single or separately.
Likewise, home equity loan interest is
deductible, but limited to the smaller of $100,000 (half as much for
each member of a married couple if they file separately), or the total
of your home's fair market value as determined by a complicated formula.
- Home Improvement Loan Interest: The interest on a home improvement loan
is also deductible, but calculated differently. You can deduct all the interest
on a home improvement loan provided the work is a "capital improvement" rather
than repairs, maintenance or cosmetic upgrades. Capital improvements typically
increase your home's value, or prolong it's life.
- Points: Points, each equal to 1 percent of the loan principal, are charged
by lenders as part of the cost of the loan. You can fully deduct points associated
with a home purchase mortgage, but not a mortgage broker's commission. Refinanced
mortgage points are deductible too, but only when they are amortized over
the life of the loan. Once you refinance a second time, the balance of the
old points from a refinanced loan offer an immediate write off, as you begin
to amortize the new points.
- Property Taxes: Property taxes or real estate taxes are fully deductible.
Any local city or state property tax refunds reduces your federal property
tax deduction by the same amount.
- Capital Gains Exclusion: Home buying investors' best tax shelter comes
from provisions in the Taxpayer Relief Act of 1997 which allows married taxpayers
who file jointly to keep, tax free, up to $500,000 in profit on the sale
of a home used as a principal residence for two of the prior five years.
The amount is halved for those filing single or separately.
- Home-Based Business Deduction: Home offices that use a portion of your
home exclusively for business could qualify you to deduct a percentage of
costs related to that portion. Included are a percentage of your insurance
and repair costs, utility bills and depreciation.
- Selling Costs and Capital Improvements: When you sell your home, you can
reduce your taxable capital gain by the amount of your selling
costs, which include real estate commissions, title insurance, legal fees,
advertising and inspection fees. Cost typically stemming from decorating
or repairs -- painting, wallpapering, maintenance, and the like -- are also
selling costs if you complete them within 90 days of your sale and with
the intention of making the home more saleable.
- Moving Costs: A move triggered by a new job comes with some deductible
moving costs. To qualify, you must meet certain requirements including, moving
within one year of starting your new job, moving 50 miles farther from your
old home than your old job was and working full-time at the new job for 39
of 52 weeks following the move. Deductions include travel or transportation
costs and expenses for lodging and storing your belongings.
- Mortgage Tax Credit: Mortgage Credit Certificates (MCCs) allow qualifying
low-income, first-time home buyers to take a mortgage interest tax credit
of up to 20 percent (the amount varies by jurisdiction) of the mortgage interest
payments made on a home. This credit is available every year you keep the
loan and live in the house purchased with the certificate. Unlike a deduction
that reduces your income, the credit is subtracted, dollar for dollar, from
the income tax owed.
- Energy Tax Credits: The newest home-based tax credits were made possible
last year by the Energy Policy Act of 2005. Tax credits of up to $500 in
2006 and 2007 are available for upgrading heating and air conditioning systems,
insulations, windows, doors and thermostats, caulking leaks, installing pigmented
metal roofs and for otherwise putting the bite on energy waste in your home.