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Tax Day is Fast Approaching: How to Get Homeowner Tax Breaks

By Eleanor Boschert

Tax Day is Fast Approaching: How to Get Homeowner Tax Breaks

Would you ever think you'd be saving money by buying a home? While you may hand over a big check to a seller at a closing, you will gain a whole new world of tax credits when April 15th rolls around each year. Enjoy some of these tax breaks as a homeowner.

Mortgage Points

When you buy a home, you often pay points on the loan. With one point equal to 1% of the loan principal and one-to-three points typical, these can easily add up to thousands of dollars. Also, you can deduct points when you refinance.

Mortgage Interest

Interest you pay on your mortgage is tax deductible, within limits. If you're married and filing jointly, you can deduct all your interest payments on a maximum of a $1 million mortgage.

Refinancing

If you refinance, you can also deduct points and interest. But the rules are different. The points can only be deducted over the life of your refinance, not immediately. Yet, if you do a straight refinance, the entire amount is deductible as mortgage interest.

Home Equity

It is possible to deduct some of the interest you pay on a home equity loan or line of credit. Yet, the IRS places a limit on the amount of debt you can call home equity. Your total is limited to either:

  • $100,000 (or $50,000 for each of you if you are married and file separately)
  • or

  • The total amount of your home's market value, less certain other outstanding debts against it

Additional Properties

Have a rental or vacation home? You can earn certain tax credits, but they come with conditions including having to live in a second home at least 14 days of the year.

Property Taxes

The taxes you pay on your home are fully deductible.

Home Improvements

If you take out a loan to make substantial home improvements, you can deduct the interest, with no limit. However, the work must be a capital improvement that increases your home's value, life, or expands its use. Ordinary repairs need not apply.

Energy Efficiency Home Improvements

You can earn up to a $500 credit off your federal income tax for making certain improvements that increase the energy efficiency of your home. A credit lowers your taxable income, or is money taken off the amount you owe. Also, certain products have specific credits, so do your research.

Home Office

Work at home? You may be able to deduct certain home costs exclusively associated with your business. But you must be legit. Your home office must be your principal place of business. Also, it can only be a space exclusively used for business, nothing else.

Private Mortgage Insurance (PMI)

When you buy your home and apply for a loan more than 80% of the purchase price, you may end up paying PMI for a good part of the loan (at least until the balance drops below 78% of your home's value or you've made 60 payments.) If you earn less than $110,000 and your mortgage was originated after January 1, 2007, you can deduct PMI.

Damages Due to Natural Disasters

With all the crazy weather wreaking havoc on homes, there are special tax deductions allowed for damages due to natural disasters. Typically the IRS requires that the first $500 in losses be deducted from any claims. The calculations and itemization can be complicated, but it can be worth it in the end.

When You Sell

It just gets better. If you are planning to sell your home, you can be eligible for claiming up to $250,000 of the profit from the sale tax-free. If you're married, you can claim up to $500,000, tax-free. But this requires your home to be your primary residence and you must have lived in it for two of the past five years.

Furthermore, if the profit on the sale of your home exceeds the $250-$500,000 cap, you can still reduce your taxes paid by claiming costs of selling your home as deductions. Closing fees, repairs to damages, and capital improvements can be applied, figuring into the cost basis of your home, creating a larger tax benefit bracket.

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