As we ring in a New Year, in addition to the excitement of new opportunities, it can also signal that time when we have to dig through piles of papers looking for receipts in preparation for tax deductions, plus the first hints of "tax panic" may be creeping up at the thought of wondering if you will be going on a short vacation with your tax refund, or emptying out your savings to pay a tax debt. With a little effort, homeowner tax deductions may be able to ease some of your tax stress. Let's take a look at some of the common tax deductions your home offers, and a few not-so-well-known ones.
[Important Note: I am NOT a tax professional, nor represent the IRS. I have simply gathered some of the best information I can find and offer it to you as a starting point for your own research. As of this writing, updated 2016 information has not been made available by the IRS. Consult with a tax professional before taking any deductions and to make sure that you are not leaving any credits/deductions on the table.]
QUALIFYING HOMEOWNER TAX DEDUCTIONS
According to the National Association of Realtors, homeowners save an average of $3000/year in taxes from deductions. It is well-worth your time to make sure you are getting every deduction you can. The basic deductions available to homeowners are:
- REAL ESTATE TAXES PAID. Most of us have estimated property taxes put into an escrow account and then the mortgage lender pays the taxes on our behalf. Deduct only the amount paid to the taxing authority, not the amount paid into escrow.
- QUALIFIED MORTGAGE INTEREST. Monies spent on interest or points, secured by a principal or second home, qualifies. A qualifying home is one that provides sleeping, cooking, and toilet facilities. A tiny home or house boat mortgage interest may be eligible! (check with your tax professional).
Regarding a second home, it does not have to be occupied by you during the year, BUT if you rent it out, you must occupy it the greater of 14 days or 10% of the days rented out. (For example, you have a lovely mountain home for vacations, but decide to rent it out 3 months (90 days) out of the year. To qualify for deductions, you must occupy the home 14 days in that calendar year; 9 days is 10% of the rental time; however, 14 days is greater than 9. )
- MORTGAGE INSURANCE PREMIUMS. Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance, and which you accrued or paid premiums on a contract issued after Jan. 1, 2007. Prepaid mortgage premiums are deducted in the year for which they are allocated. (See Publ. 936. Also, Publication 17 and Topic 504)
Additional deductions that may apply to you are:
- Home improvements for medical reasons. (Click here for IRS guidelines)
- Home Office Deductions: The IRS has made accommodation for a simpler method of calculation, but it has a cap. See your tax professional to determine the best way to calculate your deduction.
- Private Mortgage Insurance
- Mortgage Prepayment Penalty
- Energy-efficiency (up to $500)
- Mortgage-Debt relief (i.e. foreclosure/bankruptcy) Between 2007-2016, you may not have to pay tax on the benefit realized from a mortgage debt cancellation. Read IRS guidelines here. (This benefit has been extended through 2016, but may not be available after this tax year, 2016).
- Mortgage insurance on a refinance, home equity loan, or home equity line of credit.
- Sales Tax on a home* (*If you deduct your sales tax on your home, you may NOT deduct your state income taxes as well. It's either/or. Consult a tax professional to decide what is best for you.)
- Local Benefits: You can deduct taxes or charges imposed on you for maintenance and repair of existing local benefits, such as sidewalks or streets, water or sewer. The deduction must be provable that the charge was for repair or maintenance.
- First Time Home Buyer Credit: If you bought your first home in 2008, 2009, or 2010 and you didn't take your credit, you still can. Keep in mind that you may have to repay the credit. For more info, read this article by Forbes.
If you purchased a home this year, another deduction that you can take is real estate taxes paid by the previous owner in this calendar year. For example, you purchased your home in September, but the seller paid the real estate taxes for the year in August. Even if you did not reimburse them for the taxes, you may prorate the taxes from the date you purchased the home until the end of the year, and deduct that portion of the property taxes paid.
WHAT IS NOT DEDUCTIBLE
Even though the following items are NOT deductible on your taxes, they may be used towards the cost basis of your home, so keep clear, detailed records - they may come in handy when it is time to pay a Capital-Gains tax.
- Title insurance
- Homeowners/fire insurance
- Cost of utilities
- Forfeited deposits/earnest money
- Delinquent taxes paid on a home your purchased.
- Home improvements
- Local Benefits such as a NEW sidewalk or street, water, or sewer.
- HOA fees
- Transfer/Stamp taxes
- Mortgage interest on rental properties
- Wages for domestic help
- Pest control
- Escrow fees
- Monies used to reduce the principal
- Settlement or Closing costs
MORTGAGE CREDIT CERTIFICATE (MCC)
The Mortgage Credit Certificate Program is a locally-governed program that allows qualifying, low-income homeowners to receive an annual federal tax credit. The tax credit enables the taxpayer to subtract the amount of the credit from their annual federal income taxes.
Check with your local county to view the requirements and benefits. For El Paso County, Colorado, you can see the program details here: EL PASO COUNTY MCC PROGRAM.
The key to obtaining an MCC, you must contact your government agency PRIOR to purchasing a home/obtaining a mortgage. Also, you may be required to repay any credit you use at the time you sell your home. See Publication 523 for details.
MILITARY HOUSING ALLOWANCE / CLERGY
In Colorado Springs there is a large military population. One benefit allowed our uniformed service members is the ability to deduct real estate taxes and mortgage interest, even if you receive a non-taxable home allowance. For serving our country, you receive a tax benefit on both ends of owning a home! (IRS Publ. 3). The same benefit applies to members of the clergy. (See IRS Publ. 517)
I realize taxes can be confusing and instead of trying to make sense of what deductions we may or may not qualify for, sometimes we just ignore them. Hopefully, this article has cleared up a little confusion, steered you in the right direction, and offered some resources to make tax-time just a bit easier on the brain!
Here is to a prosperous New Year to you and your family. ~ Susanna