How your home can cut your tax bill
Saturday, March 10, 2012
I've noticed a lot of "for sale" signs, and some "sold" ones, too, in my neighborhood of late.
When I was a new homeowner, the annual rash of signs used to freak me out. I thought, "My gosh, we just moved in and all these people are leaving! What's the deal?!"
Yes, in every community there are some folks who have to sell for less than ideal reasons.
But the main reason for all the Realtor signs is that spring is a prime home selling time. People put their homes up for sale now as the weather starts getting warmer and more folks are out an about.
There's also the natural sense of change that comes with the new season of growth.
Plus, if folks can sell their homes in the spring, that gives them the summer to find and move into a new one and get the gets settled in their new school district before classes start.
So today's Daily Tax Tip looks at the many tax breaks available to homeowners.
Mortgage interest: Of course, the biggie is the home mortgage interest deduction.
You can deduct the interest on the loan you got on your primary home (that's the one where you live most -- and for most of us, all -- of the time) as long as your loan isn't more than $1 million. If your castle really is an expensive mortgaged castle, the Internal Revenue Service limits your deductible interest.
If you can afford a multimillion dollar house, you might be able to own other homes, too. Your interest on that ski lodge or beach house or even the fully kitchen and bathroom equipped yacht you spend months on cruising around the Mediterranean also is deductible.
And if you got a home equity loan or line of credit, interest on up to $100,000 of that loan is deductible, too.
Points, that 1 percent of your loan amount you paid to get a lower rate (yes, this was more common when home loan rates were much higher) also count as deductible mortgage interest.
Even points you pay to refinance your home can count, but you have to spread refi points deductions over the life of the new loan.
IRS Publication 936 has more details and examples and worksheets on these home mortgage interest situations.
Property taxes: If you own a home, you know you paid a lot each year to your local tax collectors. Well, you get to deduct those payments.
You also can deduct the property tax payments on your second home.
Heck, Uncle Sam allows you to write off the property taxes on all your real properties, regardless of how many you own.
Capital gains tax on your home sale profit: One of the best tax shelters around is the exclusion of profit when you sell your primary residence.
If you're a single homeowner, up to $250,000 in profit you make on the sale of your home is tax free. The tax exclusion amount is $500,000 for a home-selling married couple who files a joint return.
To get this tax break, you generally must have owned and lived in the home (that includes both husband and wife residency under the roof) for two of the five years before you sell it.
Improvements you make to your home can increase its basis, that it, its value, and that will help reduce your sale profit for tax paying purposes.
Itemizing required: Finally, remember that you must itemize to claim all the great tax deductions for mortgage interest and property taxes.
Yes, a few years ago Uncle Sam did allow a few homeowners to add property tax payment amounts to their standard deduction claim. That's no longer the law.
However, some homeowners who pay private mortgage insurance, or PMI, still can deduct at least a portion of those payments. This tax deduction, again only for itemizers, was extended through the 2011 tax year. It's unclear whether it will be continued when Congress finally gets around to considering tax extenders legislation.
So homeowners, be sure you have Schedule A handy.
Read and hear more: The IRS has lots of home related publications.
In addition to the previously mentioned IRS publication on the home mortgage interest deduction, check out IRS Publication 530, Tax Information for Homeowners, and IRS Publication 523, Selling Your Home.
You also can listen to my mellifluous tones as I discuss homeownership tax breaks.
A quick update on this podcast I did in connection with my book, The Truth About Paying Fewer Taxes: I recorded it when the option to add property taxes to the standard deduction was in effect. I note that it was temporary, but just want to make sure that's clear.
To all home sellers and buyers, happy spring home shopping season. May you all get the best possible prices and the homes of your dreams to go along with all your home-related tax breaks.
You also might find these items of interest:
You can follow this conversation by subscribing to the comment feed for this post.