The federal government is keenly aware of the national real estate market’s significance and impact on the overall economy. As a result, there are plenty of tax breaks available to consumers that encourage home ownership and benefit current homeowners.
Libertyville, IL (PRWEB) January 22, 2016
Marian Schaffer, Principal and Founder of Southeast Discovery, a real estate consulting firm specializing in guiding Baby Boomers with their real estate needs in the niche markets of retirement relocation and second homes in the Southeast region, recently shared nine real estate tax deduction tips for current and prospective homeowners.
“The federal government is keenly aware of the national real estate market’s significance and its impact on the overall economy. As a result, there are plenty of tax breaks available to consumers that encourage home ownership and benefit current homeowners,” said Schaffer. “Both prospective and current homeowners should take the time to learn about these tax deductions to make sure they are taking advantage of all the financial benefits available to them.”
According to Schaffer, homeowners should take advantage of the following nine tax deductions:
1. Home Mortgage and Refinancing Points: Mortgage lenders charge a variety of fees, one of which is called "points;" one point is equal to 1% of the loan principal. “When you purchase real estate and close on the loan, you can write off the points you paid (both origination and discount points) at closing,” said Schaffer. “Depending on your eligibility, you can either deduct all the points at once, or you may have to amortize them over the life of the loan.”
2. Home Improvement Loan Interest: The IRS considers interest on a loan to make substantial home improvements fully deductible, up to $100,000 in debt; the work must be considered a "capital improvement" rather than ordinary repairs. Qualifying capital improvements are those that increase your home's value; examples include things like adding a new roof, fence, garage, porch, built-in appliances, insulation, heating/cooling systems, or landscaping. Standard repairs, such as repainting, plastering, wallpapering, patching a roof, repairing broken windows, and the like are not deductible.
Interest paid on a HELOC (home equity line of credit) is also tax deductible, but a home loan that is worth more than the value of the property is not deductible.
3. Property Taxes: “In most cases, property taxes are tax-deductible, and transfer taxes can be written off as well,” said Schaffer. “Other items on your settlement statement when you close, for example your attorney and appraisal fees, title insurance and credit report costs, cannot be written off on your taxes.” And a city or state property tax refund will reduce your federal deduction by the same amount, Schaffer notes.
4. Energy-Efficiency Tax Credit: Installing storm doors, energy efficient windows, air-conditioning and heating systems, and insulation can get you a tax credit, Schaffer noted. This credit has a maximum lifetime limit of $500 and you can only use $200 of this limit for windows; this credit will expire on Dec. 31, 2016.
5. Renewable-Energy Tax Credit: Homeowners may be eligible for the Renewable Energy Efficiency Property Credit if they installed equipment that uses renewable sources of energy like the sun and wind to help power their home, Schaffer noted. This tax credit can be as high as 30% of the cost of the equipment as long as the equipment is in service by December 31, 2016.
6. Income and Interest on Reverse Mortgages: “Reverse mortgages are considered a loan advance, not income, so the IRS doesn’t tax you on the amount you receive in a reverse mortgage,” said Schaffer. “However, the interest accrued on a reverse mortgage isn’t deductible until the loan is paid off, so you can’t take an annual deduction for the interest as you could with a traditional mortgage.”
7. Private Mortgage Insurance: “If you were required to buy PMI (private mortgage insurance) by your lender, the PMI premiums are tax-deductible for mortgages taken out after 2006, but the amount of the deduction depends on your income,” said Schaffer. Schaffer noted that if household earnings are over $100,000 per year, the deduction starts to phase out, and you receive no deduction at all if your income is more than $109,000 per year. These amounts will change if married but filing separately.
“This deduction was created as part of the Tax Relief and Health Care Act of 2006, and was extended at the end of 2014. Unless Congress decides to renew it, it expired at the end of 2015,” Schaffer noted. “The good news is, Congress has renewed the same set of expired tax breaks for years, including this one, but you should nevertheless be very careful about making tax moves before another possible extension of the PMI deduction becomes official.”
8. Home Improvements and Expenses: “If making home improvements, you can’t write off the cost of materials and labor, but you can write off the interest of a home loan to pay the contractor and purchase the materials,” Schaffer noted. “And if you sell your home, you can add the cost of the improvements to the asking price, which will decrease the capital gains you may otherwise owe.”
9. Buying a House: Schaffer noted that the IRS allows first-time home buyers to withdraw up to $10,000 from their traditional IRA and Roth IRAs without penalty to help with a home purchase. A spouse, parent, child or grandchild can contribute another $10,000 from their IRA accounts, for a total of up to $20,000. Buyers can also borrow half of their 401k balance up to $50,000 for the purchase of a home, but the interest on a 401k loan is not tax-deductible.
Other tax deductions homeowners may want to investigate include a home office deduction; selling costs such as real estate broker's commissions, title insurance, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees; capital gains exclusion; and if you moved to take a new job, moving costs. For consumers who want to find out more, the IRS website has a number of free publications on real estate tax laws and deductions.
“Real estate activity will always be a crucial factor to our nation’s economy, therefore, the government will always provide tax incentives to entice consumers to purchase and own real estate,” said Schaffer.
About Southeast Discovery
Since 2004, Southeast Discovery has been a trusted resource for candid information and insight on communities, developments, and general real estate in the Southeast. Through its highly-ranked web portal, newsletter and blog and its one-on-one work with clients, Southeast Discovery helps buyers actively looking for a retirement or second home in the Southeast navigate the process of identifying the right area and community for their needs. To learn more, visit http://www.southeastdiscovery.com/.