Tax day is looming closer and closer. While this is not tax advice (Formal disclaimer, I am not a lawyer, doctor or CPA…) there are some tax deductions and credits for homebuyers, homeowners, and even home sellers.
The most well-known tax deduction is mortgage interest paid. This applies to not only your primary home, but for a second home as well. It also applies to second mortgages. When the home loan is in the early years, this can be a very significant deduction. This is because the mortgage interest is front loaded in the amortization schedule and the interest payments exceed the principle payments for the first 10 years. The IRS has a 1 million dollar cap on the loan amount. Loans over 1 million dollars are exempt from the mortgage interest deduction. This cap causes homeowners with very large mortgages to limit the loans to $1 million.
Discount points paid when purchasing or refinancing a home can be significant tax deduction. The IRS considers discount points interest prepaid to the lender. How the points can be deducted depends on the type of loan. Discount points that are paid in the original purchase can be deducted in the year they were paid. Refinance discount points are usually amortized over the length of the loan. On a refinance that is for 25 years, 1/25 can usually be deducted per year of the loan.
Property taxes can be deducted for the year in which they are paid. If the taxes are escrowed by the lender, you will receive a statement annually of the amount of property taxes paid. This can be filed with the federal return.
Home improvements made for medical reasons, renovations made for disabled or critically ill persons that do not add to the value of the home are 100% deductible. Improvements made for aesthetic reasons are not deductible.
Home improvement loan taken out to make “capital improvements” to the home are eligible for tax deductible interest. Capital improvements increase the value of the home. These can include putting on a new roof, adding a swimming pool, garage, heating/cooling systems and porch just to mention a few. Repairs that do not qualify are repairing the roof, painting, plastering, replacing broken windows and many other repairs.
Home office deductions can be tricky but is well worth the work. Here is the IRS link that will really help when trying to figure out what is deductible and what percentage: www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction. Another great link is www.irs.gov/uac/Must-Know-Tips-about-the-Home-Office-Deduction.
Renewable Energy Efficiency Property Credit will be expiring in December of 2016. This is for anyone who has installed equipment that uses renewable energy such as sun and wind to power the home. The credit can be up to 30% of the cost of the equipment including installation. It must be installed by the end of December 2016.
For more information on real estate tax laws visit www.irs.gov.
Written by Tayna Vy, 941-955-2224