This post comes from Tim Manni at partner site HSH.com.
If you’re in the market for a home, there are many more advantages to purchasing real estate than the low mortgage rates we have enjoyed for the past several years.
As Eric Zinn, director of the University of Colorado Denver Business School’s Graduate Tax Program, explains, a multitude of those advantages come into play during tax season.
No. 1: Mortgage interest deduction
As a general rule, you can deduct interest paid on mortgages used to finance up to two residential properties. Nevertheless, your mortgage interest deduction may not be fully deductible if the total outstanding balance exceeds $1 million, or you use the borrowed money for something other than the purchase, construction or improvement of your residences.
No. 2: Home equity loan interest deduction
Homeowners can deduct the interest paid on a home equity loan or line of credit. Your home equity loan interest deduction may not be fully deductible if the total outstanding balance on the loan exceeds $100,000. Homeowners often use money from a home equity loan to pay off other personal debts and credit cards and then generate tax-deductible interest payments on the home equity loan.
No. 3: Mortgage insurance premiums
You may be able to deduct mortgage insurance payments on a principal residence or second home. Mortgage insurance is provided by the Department of Veterans Affairs, Federal Housing Administration, U.S. Department of Agriculture or private insurers.
No. 4: Points and other settlement payments
Recent homebuyers may be able to deduct points reflected on your settlement statement. Points are generally charges paid by the homeowner to obtain a home loan. Points include loan origination fees, maximum loan charges, loan discounts or discount points.
No. 5: Real estate taxes
You generally can deduct real estate taxes if you pay taxes either at the closing of the purchase or to a taxing authority, either directly or through an escrow account with your mortgage lender, during the year.
No. 6: Home office expenses
If your home is your principal place of business, you may be able to deduct expenses associated with your home office. Generally, you calculate your deductions based off of the percentage of the home devoted to the office. Deductible home office expenses include a percentage of mortgage interest, real estate taxes, insurance, utilities, repairs and depreciation. IRS Revenue Procedure 2013-13 provides a simplified method that homeowners can use to calculate their deductible home office expenses.
No. 7: Vacation homes
A homeowner who rents his or her vacation residence for 15 or more days per year generally can deduct some of the expenses associated with that rental. You allocate vacation home expenses — mortgage interest, taxes, insurance, utilities, repairs and depreciation — between nondeductible expenses associated with your personal use of the home and the deductible expenses associated with the rental. In any given year, if your allocated rental expenses exceed the rental income earned, you generally may only deduct allocated expenses up to the amount of rent earned. Any excess expenses may be carried forward and deducted in subsequent years.
No. 8: Moving expenses
If you relocate for a job, you may be able to deduct moving expenses. Deductible moving expenses include the costs of moving and traveling, excluding meals. IRS Publication 521, Moving Expenses, provides information about this tax incentive. To claim deductible moving expenses, you must file IRS Form 3903.
No. 9: Casualty and theft losses
If your home is destroyed or damaged by a flood, fire, earthquake or theft, you may generate a deductible loss to the extent of any economic loss suffered by the homeowner not covered by insurance. Use IRS Form 4684 to report casualty or theft loss.
No. 10: Mortgage debt forgiveness
Certain homeowners can exclude from their taxable gross income discharged amounts of their mortgage balance made after 2006 and before the end of 2014.
No. 11: Residential energy credits
You may be able to claim tax credits for certain energy-saving improvements. To claim these residential energy credits, the homeowner must file IRS Form 5695.
No. 12: Mortgage credit certificate
If you received a Mortgage Credit Certificate, you can claim mortgage interest credits for your home mortgage interest payments. Low-income homeowners are eligible to claim the credit if they receive an MCC from a state or local government in connection with the purchase of a principal residence. To claim the mortgage interest credit, you must file IRS Form 8396.
No. 13: Exclusion of gain on the sale of a principal residence
You may exclude up to $250,000 of gain ($500,000 for married selling homeowners who file jointly) on the sale of a principal residence. To qualify for the exclusion, you must satisfy both an ownership test and a use test. As a general rule, to satisfy the ownership test, you must own the home for at least 24 months during the five years preceding the date of the home’s sale. To satisfy the use test, you generally must use the home as a principal residence for at least 24 months during the period of time that you owned the home for the five years preceding the date of the home’s sale.
IRS Publication 523, Selling Your Home, offers more guidance on this gain exclusion. Gain that you earn on the sale of your home in excess of the exclusion amount just described generally is taxed at preferential long-term capital gain rates if you owned the home for more than one year before its sale.
No. 14: Home improvements
Although not generally deductible, improvements that you make to your home do provide you with a tax benefit. You add the costs of any improvements to your home’s tax basis for purposes of calculating your future gain on the sale of the home. Consequently, to the extent that you increase the tax basis in your home for the costs of improvements, you will recognize a lower gain on the future sale of that home.
Nondeductible home expenses
Except as otherwise noted previously, homeowners generally cannot claim deductible expenses for homeowner’s insurance, depreciation or utility costs.
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