While rewarding, owning a home comes with many new responsibilities. Many of these tasks are simple, such as basic maintenance or yard work, but for many home owners, the consideration of their new tax burden is far from easy.
Fortunately, there are many tax breaks for homeowners. Some deductions apply for anyone who owns a home, and they may continue to receive deductions even after the property has been sold. Unfortunately, these tax breaks come along with potentially difficult complications.
Itemizing these deductions can be rewarding, though some homeowners find standard deduction remains ideal. Here are some of the important expenses that could be considered when making such an important decision.
Tax Breaks from Payments
When repaying loans, payments on nearly any interest accrued can be applied toward tax breaks for homeowners. Though this does not entirely apply to loans exceeding a million dollars, the majority of homeowners can benefit from this.
- Mortgage payments are often the largest contributor. While the entirety of mortgage payments might not apply as a deduction, for most homeowners the bulk of this payment goes toward interest, which is fully deductible.
- Interest payments from a second mortgage can also be used toward tax deductions, as long as the owner uses both properties.
- Rental properties could potentially be used for tax deductions by the owner, as long as they personally use the property for at least fourteen days, or ten percent of the time it is rented out.
- Equity debts for any home equity loan are also fully tax-deductible, for any loan less than $100,000.
For those who paid points on their loan to get a better rate, these points may be tax-deductible, but there are a few things to consider.
- If used entirely on the home, and points are an established practice among lenders in your community, they are often entirely deductible in the same year they were bought.
- If refinancing a loan, paying points is still tax-deductible, though this deduction is generally used in fractions over the life of the loan, not all at once.
- If an equity loan was spent on anything other than the property in question, such as the purchase of a new car, this deduction is likewise used over the lifetime of the loan, not all at once.
A large portion of many monthly loan payments is directly used to pay taxes, and this is usually done by placing the money into an escrow account.
- The lender’s annual statement describing the amount of these payments will be a deduction that can be used every year, for as long as you continue to own the property.
- First-year homeowners received a settlement when the deal was closed, which describes the taxes the seller owes for the partial year they owned the property.
Selling
Even though profit from the sale of property is often taxable, 1997, a new law made new tax breaks for homeowners. A portion of the profit from the sale is fully deductible, even if the money is not applied directly toward the purchase of new property.
- If married, and filing jointly, this amounts to the first $500,000 in profit.
- Any other filing status receives $250,000 tax-free profits.
- To qualify for this deduction, the property must be owned for at least two years, and the owner lived in it for at least two of the five years before the sale.
Unforeseen circumstances can make the sale of a home necessary, and with that in mind the IRS now provides tax breaks for homeowners for whom one of the following has occurred, when otherwise ineligible:
- Death of the homeowner, or divorce of joint owners
- Employment change that makes the payments impossible, or a job loss that qualifies for unemployment benefits
- Birth of twins or triplets
- Natural disasters, though this only qualifies for a partial exclusion
- Involuntary sale under eminent domain, though this also only qualifies for a partial exclusion
Tax breaks for homeowners selling their second home are available, but the deductible amount fully depends on how long that home was used for their personal residence.
What Does Not Qualify for Tax Breaks?
While many expenses can be translated into tax breaks for homeowners, unfortunately some must be fully borne by the owner.
- Insurance payments, in the form of private mortgage insurance or property hazard insurance, even if these payments are included in the monthly mortgage
- Any additional payments made toward the principal of the loan
- Homeowners Association dues
- Closing costs
- Assessments made to increase the value of your home
- General repairs to the property
Even if these are not directly tax-deductible, tax breaks for homeowners can still apply by establishing a higher basis for the home, which can reduce the taxable profit from a sale.