So this is a great and fun blog topic – taxes, yea right! Even though most Americans hate to talk about taxes or even the word IRS it’s important to know the facts and benefits homeownership offers. Please note I am not an accountant. As a realtor, I have researched all the tax items below and have included the IRS links where possible. As a service to my clients I pulled all the information together under one umbrella and I wanted to share it with you as well.
If death and taxes are the two things you can always count on in life, there probably should be a third: the bucketful of tax breaks offered every year to encourage more Americans to buy a home!
Here are 23 facts that you might or
might not know about:
1. Deduction from your Mortgage Interest
For one, Americans are able write off virtually all mortgage interest, not only for your primary home, but for a second home as well under some conditions — up to $1.1 million of debt when you include home-equity loans that are used for certain personal expenditures, such as funding college education. In most cases, homeowners are also able to write off their property taxes.
Homeowners have opportunities for dozens more federal income tax deductions than renters. The tax code is completely skewed towards homeowners. There is not a direct way in the code to get a direct tax benefit from renting. In fact, only 21 states and the District of Columbia offer renters any kind of tax breaks or credits — generally credits for what is considered to be the percentage of property taxes that is rolled into a rent payment.
Americans who owned homes saved about $1,900 a year, on average, on their taxes with the deduction in 2012. This is particularly beneficial to first-time home buyers whose early monthly payments in a 30-year loan are mostly only interest. About half (48%) of American homeowners took advantage of the MID in 2011, the CRS said. What about the other half? Well, according to the CRS, they already paid off their homes (34%) or the mortgage interest deduction was less than the standard tax deduction (18%).
Even with the bounty of tax breaks, the distribution of benefits among homeowners leaves many women and minority homeowners behind. According to a study by Trulia.com, white heads of households are more than three times likely to be eligible to claim the mortgage income deduction than African-American heads of households (who are also 57% less likely to own a home in the first place than whites), citing data from the U.S. Census’ 2014 American Community Survey.
Women who are head of households are also one-third less likely to claim the interest deduction than men, the research firm said. Overall, only 12% of tax filers with less than $50,000 in adjusted gross income (AGI) claim the mortgage interest tax deduction, compared with 94% of those with income over $200,000 in AGI, Trulia said.
2. If you sell you save Capital Gains Tax
In addition, the exclusion of capital gains from the sale of a principal residence (up to $250,000 for single taxpayers and $500,000 for married couples filing jointly) is another well-known real estate-related deduction. That deduction returned Americans $26 billion worth of federal revenue last year, and is expected to save Americans more than $27 billion they would otherwise owe to Uncle Sam in 2016, according to the CRS. Find out more about capital assets .
3. Write off on Points & Refinancing
Points on home mortgage and refinancing: If you bought a home in 2015 with a mortgage, then in addition to the mortgage interest you can probably write off the points (both origination and discount points) on your tax return. The challenge is whether you’re eligible to deduct the points all at once, or whether you have to spread the costs out over the life of the loan. Generally, if you bought your first home using a loan or got a loan to build that first home, you can take the deduction all at once, the IRS says.
4. Interest on home-improvement loan
The IRS considers the interest on a home-improvement loan fully deductible, up to $100,000 in debt. If you are going to use this you this method you must itemize each deduction. The loan must have also been secured by a home hence the word “home” in home improvement. In order for this to work the repairs done on the home must be significant it can be just maintenance items like cleaning a filter on a furnace. They have to be large projects.
5 . Property tax
Property taxes are almost always tax-deductible, and more than half (54%) of American homeowners take this deduction, according to the Congressional Research Service, with American homeowners claiming $173 billion in 2011. There are also municipal taxes that can also be deduced like the city or state taxes.
6. Residential energy-efficient tax credit
Number 6 & 7 might might confuse you, it sure did for me but here are the differences.
Definition Energy Efficient – using less energy to provide the same service
Definition of renewable energy – is energy generated from natural resources—such as sunlight, wind, rain, tides and geothermal heat.
If you made efforts to make your home more energy efficient the IRS wants to give you a tax credit of up to $500. These are known to the I.R.S. as non-business energy property credits These include energy efficient items such as windows, doors, roof. For more information on this you can go here.
7. Renewable-energy tax credit
If you’ve installed equipment that uses renewable sources of energy, such as the sun and wind, to help power your home, you may be eligible for the Renewable Energy Efficiency Property Credit. There are also specific federal tax credits that expire December 31, 2021 primarily for water solar panels the requirements are that it must come from at least half of the energy generated by the “qualifying property” must come from the sun. The system must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed. For more information on this you can go to Energy Star. You can also go directly to the I.R.S. site and look at the exact deductions that can be made.
8. Ground rent
There are rare situations in the U.S. for homeowners where the original owner still owns the land under your house after you’ve bought it, and you own the above ground property and “rent” the ground from the owner. The “ground rent” option reduces the cost of the home since you’re not buying the land. The IRS lets you get a break for this situation and thus “ground rent” amounts can be deducted if you have been paying the rent monthly or annually, so long as the lease is for more than 15 years. However, if you’re making a payment to capitalize the ground rent, to buy out the lessor’s interest to get out from under it every year, that payment isn’t deductible, the IRS says. There are certain items you can deduct for ground rent.
9. Income and interest on reverse mortgages
The IRS considers reverse mortgages as a loan advance not income, so the amount you receive isn’t taxable. But the interest accrued on a reverse mortgage isn’t deductible until the loan is paid off, so you can’t take a deduction each year for the interest as you might with the traditional mortgage interest you pay. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. For more go to here.
You may be eligible to claim the deduction for private mortgage insurance (PMI) or mortgage insurance premiums (such as those required on FHA loans) on your tax return. Private mortgage insurance is when you make a down payment of less than 20%. The deduction was set to expire after the 2014 tax year but was extended for both 2015 and 2016 tax years. Keep in mind that the deduction for qualified mortgage insurance premiums is reduced if your adjusted gross income (AGI) is over $100,000, and if it’s over $109,000 you can’t take the deduction at all. And you won’t get around that limitation if you’re married and filing separately, as the deduction begins to be reduced at $50,000 in AGI and disappears at $54,500.The PMI tax deductions are for both a home purchase and refinance transaction. For more go to here and here is another great site to look at for an explanation.
11. Home Office
If you have happen to use your home as an office or your place of business especially for those self-employed entrepreneurs you can deduct some expenses. What even better is you can also deduct taxes if you conduct your business in a garage or a barn. I remember working with a client that was using his garage for his pottery business. IRS gives you a deduction of $5 per square foot.
The home office deduction tempts every homeowner who files taxes. It seems easy enough: Just claim the den as a home office, write off those Internet bills and the cost of that new office chair and relax knowing that your home is finally working for you. But of course, you won’t do that, because taking the home office deduction is a red flag for audits, you don’t apply and the deduction is absurdly hard to figure out. Time to go to the den and brood.
Not so fast. The IRS has actually made it much easier to claim a home office deduction, and there’s no reason to believe that taking it triggers an audit. You do have to make certain you fit the criteria, but many homeowners who run a small business or have a dedicated office space in their home should take advantage of it. The biggest rule is that you need to use your home office space exclusively and regularly for business. (That means you can’t claim the family room where everybody hangs out, and you can’t claim an empty room because you’ve taken a few business calls there.) You need tax form 8829. For more you can go here.
12. IRA Tax Distribution
You may not have to pay the 10% additional tax if you used the distribution for use to buy, build, or rebuild a first home. The IRS allows first-time home buyers to withdraw up to $10,000 from their traditional IRA (and even Roth IRAs) penalty-free to help with the purchase of the home. Your spouse or even a parent, child, or grandchild can kick in another $10,000 from their IRA accounts, for a total of up to $20,000. You must use the money to buy, build, or substantially improve your first residence within 120 days. 13.) Medical home improvements: capital expenses. For more information you can go here.
14. Natural disaster
This one is unfortunate but it does happen as you know from the past with hurricane Katrina or even our very own Chicago heat wave from 1995. Due to the really hot temperatures 739 people were killed 🙁 . You may be able to deduct losses based on the damage done to your property during a disaster. Make sure you deduct within the year it happened. You will need form 4684. Also depending on the circumstances, the IRS may grant additional time to file returns and pay taxes.For more information go here.
15. Moving Expense Deduction
If you have to move your home you may be able to deduct the cost of the moving expenses. This is more for those that are doing a relocation due to a job. There are certain requirements (below). You can also deduct certain transportation, cost of packing, crating and shipping your property and lodging expenses while moving.
- Your move must closely relate to the start of work
- Your move must meet the distance test
- You must meet the time test
For more you can go here.
16. Debt Cancellation (this one is the only one that is not a benefit)
What is cancellation of debt? Per the IRS isn’t any debt that you owe that is forgiven, discharged or canceled and becomes taxable to you.
This might seem confusing but if you had to conduct a short sale or let the home go into a foreclosure you will receive a 1099-C for cancellation of debt. Be aware that any cancellation of debt is considered income. For instance, let’s say you owed $350,000 to your mortgage lender and you sold it as a short sale for $150,000. That leaves $200,000 you have to report as income that means you’re going to have to pay taxes on it.
Whether it’s a regular sale, foreclosure or short sale the IRS considers it a sale.
There are some exclusions in which you won’t get taxed on such as bankruptcy, insolvency, farm debts, non-recourse loans.
17. Renting Residential and Vacation Property
If you receive rental income you can deduct certain expenses like maintenance, utilities, insurance, and depreciation. There’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses. Limitations apply
If you use it for personal purposes during the tax year for more than the greater of:
- 14 days, or
- 10% of the total days you rent it to others at a fair rental price.
For more go here.
18. RV or Boat Loans Count as Mortgage
For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. The IRS considers a home in a broad term these structures qualify as a home:
** or similar property that has sleeping, cooking, and toilet facilities
Just remember that as long as the boat or RV is security for the loan used to buy it, you can deduct mortgage interest paid on that loan. For more you can go here.
The City of Chicago & Cook County offer tax benefits through the Department of Planning and Development. These only apply to the city proper and county.
19. Class 6(b) Property Tax Incentive
The Class 6(b) program offers a 12-year reduction in real estate assessments from the Cook County industrial rate of 25 percent. Qualifying properties are assessed at 10 percent for the first 10 years, 15 percent for the 11th year and 20 percent for the 12th year.
Properties must be used for industrial purposes and involve:
- New construction
- Substantial rehabilitation
- Re-occupancy of abandoned industrial property
20. Class 7(a) and 7(b) Tax Incentive
The Class 7(a) and 7(b) programs offer real estate tax incentives for commercial projects in specific areas. Qualifying properties can receive a 12-year reduction in real estate assessments from the standard Cook County commercial rate of 25 percent. Qualifying properties are assessed at 10 percent for the first 10 years, 15 percent for the 11th year and 20 percent for the 12th year.
The area must be a Redevelopment Area, Empowerment or Federal Enterprise Zone.
- 7(a): Project costs less than $2 million
- 7(b): Project costs more than $2 million
21. Class 7(c) Tax Incentive
The Class 7(c) Commercial Urban Eligibility (CURE) program offers real estate tax incentives for commercial properties regardless of where they are located. Qualifying properties can receive a five-year reduction in real estate assessments from the standard Cook County commercial rate of 25 percent with no minimum investment required. Qualified properties are assessed at 10 percent for the first three years, 15 percent for the fourth year and 20 percent for the fifth year.
Properties must involve:
- New construction
- Substantial rehabilitation
- Re-occupancy of abandoned commercial property
For more on the programs with the City of Chicago go here.
22. Special Rules for Cooperatives
If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. You can deduct your share of the corporation’s deductible real estate taxes if the cooperative housing corporation meets certain conditions. For more information you can go here .
23. Investment Property
As an investor that might be flipping houses or just holding the properties to rent you can claim business expenses on your taxes. This will help you minimize your taxable income. Be careful though if you claim to much then it might be sending a red flag to the IRS you might get hit with an audit.
Remember the type of entity such as Sole Proprietor versus S Corporation will also play a role in what you can deduct.
Some of the typical expenses include
- Cost of Goods Sold
- Capital Expenses
- Business use of your car
For more you can go here.