Home Ownership
Click one of the following links for more information on how one of the following events may affect your tax situation:
Contact your neighborhood Jackson Hewitt office for more information.
Buying a Home
Thinking of buying a home? How will this affect your tax situation? Most of the expenses incurred when buying a home are not deductible. There are, however, certain closing costs that are added to the basis of your residence. Keeping track of the basis of your home is important because when you sell, the basis is needed to calculate any gain or loss.
The following closing costs incurred at purchase are added to the basis of your residence: brokers' commissions, attorney's fees, recording fees, abstract fees, surveys, title searches, owner's title insurance policy, and transfer taxes. These items are generally found on your closing settlement statement.
If you are a first time homebuyer and you purchase your new home after April 8, 2008 and before July 1, 2009, you may be able to take a one time credit of up to $7,500. The credit is repayable over a fifteen year period as an addition to your tax bill, with no interest.
Back to Top
Owning a Home
The IRS allows current-year deductions on certain expenses associated with owning your home.
Real Estate Taxes
You may deduct real estate taxes in the year paid. They are generally reported on Form 1098, Mortgage Interest Statement , the annual statement from the financial institution holding your mortgage, or on your county real estate tax assessment statement. You should also deduct any prorated taxes collected from you at closing. These amounts are not always included on Form 1098, but may be itemized on your real estate closing statement.
Local Taxes and Assessments
Local taxes are deductible if they are charged uniformly against all property in the jurisdiction and if they are based on the assessed value of your home. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. You can, however, increase the cost basis of your property by the amount of the assessment.
Charges for services such as trash collection are not deductible even if paid to the taxing authority and included on the property tax bill.
Homeowners' association assessments are not deductible because they are imposed by the association and not the government tax authority.
Mortgage Interest
The amount of mortgage interest you paid on your principal residence (or second home) is deductible. This amount is generally shown on Form 1098, Mortgage Interest Statement . You can also deduct the points paid to purchase your residence, even though some may have been paid by the seller. Points paid to purchase or improve your main home can usually be deducted in full in the year paid. Otherwise, they must be deducted over the life of the mortgage. Both the points paid by you and those paid by the seller are usually shown on your closing settlement statement. Points may also be called "loan origination fees", "maximum loan charges", "loan discount", or "discount points" on the closing settlement statement. Seller-paid points you claim as an itemized deduction reduce the cost basis of your home. Points paid on a refinanced loan generally must be deducted throughout the life of the mortgage.
For example, Alonzo Blanco purchased his first home this year. His closing settlement statement shows loan origination fees of $3,600. Alonzo can deduct $3,600 for points on Schedule A, Line 10 or Line 12.
While you own your home, keep a record of the cost of improvements you make that add value to your home, such as landscaping, patios, swimming pools, decks, room additions, and roof replacements. These items are additions to your cost basis. Repairs such as fixing leaks, repairing roofs, and painting are not deductible and are not basis additions. The cost of your own labor is not deductible.
Repairs & Improvements
The terms repairs and improvements can be confusing as it applies to the value of your home. A repair or maintenance expense is not tax deductible and cannot be added to the basis of your home. An improvement adds to the value of your home and is added to the basis. Adding vinyl siding and installing a security system are examples of improvements.
Real Estate Refinancing - Proceeds Used for Home Improvements
When interest rates drop, there is often a rush to refinance home mortgages. Many homeowners assume that they may also deduct their points. If you use the proceeds of your new loan to make home improvements, you generally may deduct the loan points in the year you refinance. If the proceeds of a refinanced mortgage are not used to improve your property, the points paid are deducted over the life of the mortgage.
For example, Ling Chow took advantage of lower interest rates and refinanced the mortgage on her main home. She did not make any improvements on her home. Ling's closing settlement statement shows points of $3,300 on her 30-year mortgage. Ling can deduct $110 ($3,300 ÷ 30 = $110) for points on Schedule A, Line 10 or Line 12 this year and in each of the next 30 years, or she can deduct any balance remaining when the loan is paid off.
If only a portion of the loan is used to improve the home, only that portion of points is deductible in the year paid. The remainder must be deducted over the life of the loan.
The portion of points paid to refinance a loan not used to substantially improve your main residence is generally deductible in equal amounts over the life of the loan. Any points not deducted by the year the loan is paid off are usually fully deductible in the payoff year.
For example, Joseph Blackfeather is refinancing his home mortgage for the second time. He remodeled his kitchen and added a swimming pool for a total of $30,000. He has been deducting $130 for points every year since his first refinancing when he paid $3,900 for points. He has deducted a total of $650 of those points. The closing settlement statement for his second refinancing shows $2,700 for loan discount on his 30-year mortgage of $135,000.
Joseph can deduct on Schedule A a total of $3,920 for points consisting of:
$3,900 – $650 = $3,250, the remainder of points from first refinancing;
plus $30,000 ÷ ($135,000 ÷ $2,700) ≈ $600, the second refinancing portion of points attributable to home improvement;
plus ($2,700 – $600) ÷ 30 = $70, the annual portion of the second refinancing points that are amortized over the life of the loan.
Casualty or Theft Loss
If your home is damaged from a sudden, unexpected event such as a fire, a storm, vandalism, or theft, the loss that is not covered by insurance is deductible subject to certain limitations. A deductible casualty or theft loss reduces the cost basis of your home by the amount claimed as a deduction. For more information on how to claim a casualty loss go to Disaster Recovery Tax Guide on Jackson Hewitt's MyTaxManager.
Mortgage Interest Credit
The mortgage interest credit helps lower-income individuals afford home ownership. If you qualify, you can claim the credit each year for part of the home mortgage interest you pay. You may be eligible for the credit if you were issued a mortgage credit certificate (MCC) from your state or local government. You must obtain a MCC from the appropriate government agency before you get a mortgage and buy your home.
Back to Top
Selling Your Home
The IRS allows up to $500,000 of the gain from the sale of a principal residence to be tax free if you are married and filing a joint return; $250,000 is nontaxable for a single person. To take the full exclusion, you must have owned and used the property as your principal residence for two of the last five years before the sale. If you move before satisfying the requirement due to a change in place of employment or a change in health, your exclusion can be adjusted by a prorated amount based on the time spent in the home. Individuals serving on qualified official extended duty in the military can elect to suspend (for up to ten years) the five-year test period ending on the date of sale of the residence.
The exclusion or reduced exclusion can be taken once every two years for an unlimited number of times by a seller of any age if all requirements are satisfied. Losses on the sale of your home are not deductible.
The exclusion is also reduced by any business use of the home.
Back to Top
First-Time Homebuyer Credit
If you received a First-Time Homebuyer Credit in 2008, you must repay one-fifteenth of the allowed credit annually in 2010.
Back to Top
Back to Tax Topics