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Real Estate

Tax Breaks and Deductions for Homeowners

Owning a home offers a tremendous amount of tax benefits that can help offset other financial burdens like high mortgage payments. Here are the tax breaks that may be available to you as a homeowner to help reduce your tax bill. For more information, refer to IRS Publication 503.

Your home is often the largest investment you make over your lifetime. Due to the high cost of owning a home, the tax code allows certain expenses associated with your home to be deducted on your tax return each year. These deductions are referred to as itemized deductions.

The tax code allows taxpayers to deduct either the annual standard deduction or total itemized deductions from the adjusted gross income on their tax return. The total after this last deduction is your taxable income. 

Of course, you should have more in itemized deductions than your standard deduction to make itemizing worth your while.  Look at your total mortgage interest, state and local income or sales taxes, property taxes, and charitable contributions.  There is also a deduction allowed for medical expenses that exceed 7.5% of your adjusted gross income.  

Mortgage interest deduction

You can deduct the mortgage interest on your home when you itemize deductions. The mortgage interest deduction is capped at interest paid on no more than $750,000 of the principal. If you have a mortgage that went into effect before Dec. 15, 2017, you can continue to deduct interest on loans up to $1 million.

You can still deduct interest on the proceeds from an equity line that was used to improve your home, as long as the total principal from the first mortgage and the equity line don’t exceed the original mortgage or the $750,000 cap.

Points

Points are the amount of money you pay to bring down your interest rate. The points themselves are treated as mortgage interest and can be deducted as part of your itemized deductions.

Tip/Help

You may deduct a total of $10,000 of all taxes paid, such as real estate taxes, personal property taxes, and state and local income or sales tax.

Real estate property tax deduction

You may deduct a total of $10,000 of all taxes, real estate, and personal property taxes as well as state and local income or sales tax. Taxpayers that live in high-income or high property tax states may be limited to a lesser amount of taxes than what was actually paid.

Private mortgage insurance (PMI)

Mortgage insurance premiums are currently allowed as an itemized deduction. Mortgage insurance premiums paid in 2020 may be deducted as mortgage interest.  But the deduction is phased out where the Adjusted Gross Income (AGI) of a married couple filing jointly reaches $100,000 ($50,000 if married filing separately).

Home improvements

Keeping your home modern and appealing can take a lot of money.  And while you can’t deduct the cost of improving your home you can keep track of all these costs and include them as part of the basis (your cost plus any improvements) in your home.

Improvements include any asset or item that extends the life of your home or upgrades the home. They can include:

  • A new roof
  • New hot water heater
  • New furnace and air conditioning system
  • New windows
  • Upgraded kitchen
  • Upgraded bathrooms
  • Wood or tile flooring

Medically necessary home improvements may be deducted as medical expenses.

Residential energy credit

There are two Energy Credits available to homeowners. The first is a lifetime credit amount of up to $500 for energy-efficient home improvements such as:

  • New windows
  • New central air
  • New furnace
  • New insulation

The second is a much larger credit for installing energy-saving items such as:

  • Solar energy for all except a pool or hot tub
  • Small wind energy property
  • Geothermal heat pump
  • Fuel cell property

For more information see irs.gov

Penalty-free IRA withdrawal for first-time homebuyers

If you, or a family member, are buying your first home, you can withdraw up to $10,000 from your IRA and not be subject to the additional 10% tax.  The withdrawal will be taxable if it is from a traditional IRA.

Tax-free profit if you sell your home

Taxpayers who live in their home for two of the last five years and own their home for two of the last five years are eligible for an exclusion from taxes of up to $250,000 ($500,000 if filing jointly) in profit. 

Profit is determined by adding all home improvements to your purchase price and subtracting the total from your sales price.

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