Home ownership is a sweet deal. There’s nothing like having a headquarters, a home base, a launching pad for life. Home is the backdrop for the best times of our lives and the place we go to for refuge during the bad times. In the past few months, just about all of my clients have told me that home ownership is especially sweet at income tax time.
Everybody knows about the advantages of the mortgage deduction, but I’m going to tell you about other, less known ways to reduce the tax bite. I’m not a tax lawyer or an accountant, so please check with a professional to make sure that you are eligible to cash in on these strategies for reducing your taxes.
By now, most people are aware that the government offers homeowners tax credits for energy efficiency. These credits aren’t just limited to the purchase of Energy Star qualified dishwashers, refrigerators and other appliances. Until 2016, homeowners who install solar, geothermal, or wind systems to generate electricity or heat water are eligible for a tax credit worth 30% of the cost of the system, with no upper dollar limit. The installation of a fuel cell system is rewarded with a similar tax credit, only in this case there is a ceiling of $500 per kilowatt of power generated. The tax credit includes installation costs. To learn more about this credit, visit EvergyStar.gov.
Medical-related expenses are another area where you can reduce your taxes. If you’ve had to add ramps or other features to make your home more safe and accessible to an elderly or handicapped member of your household, you may be able to deduct the cost of the improvement as a medical expense.
Another possible source of a tax break is mortgage debt that has been forgiven by your lender. This can be of great benefit if you’ve recently had to sell your home in a short sale. Up until the Mortgage Forgiveness Debt Relief Act of 2007, debt that was forgiven by the lender was considered to be taxable income by the IRS. Under the Act, the IRS temporarily was barred from collecting tax on this income source. On December 31, 2012, this tax break will expire. Also, be aware that this break applies only to your principal residence. Debt on a second home, vacation or investment property that is forgiven by the lender is still subject to taxation by the IRS. The Mortgage Forgiveness Debt Relief Act of 2007 also extended a tax deduction for private mortgage insurance (PMI), which was originally set to expire in 2007. The extension allows eligible homeowners to deduct the cost of their mortgage insurance premiums through 2012. Home-owning families with an adjusted gross income of $100,000 or less qualify for the deduction. Families with incomes up to $109,000 are eligible for a partial deduction. To learn more, read the IRS’s publications Home Mortgage Interest Deduction and Publication 53: Tax Information For First-Time Homeowners, available from the IRS website at www.irs.gov.
Then there’s the home office deduction. If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. According to the IRS, there are two basic requirements for your home to qualify as a deduction:
- Regular and Exclusive Use. You must regularly use part of your home exclusively for conducting business.
- Principal Place of Your Business. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers. Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Home Improvement Loan Interest
Home improvement loans can be another deduction. The good news is that for qualifying repairs such as installing a new roof or new landscaping, you can deduct the interest on the home improvement loan with no limits. The catch is that ordinary home repairs such as painting don’t qualify. Only work that increases your home’s value, prolongs its life, or adapts it to new uses are eligible for the deduction.
As you can see from these examples, there’s no place like home during tax season.
If you’ve considered buying a home but have been waiting on the sidelines, think again. Many of these tax credits and tax breaks will expire in a few years. With interest rates and home prices still at historic lows, now is the time to take advantage of the tax benefits home ownership offers.
To learn more, contact The Ashley Leigh Team at Linton Hall, Realtors®. We are the area’s leading real estate experts. Whether you’re buying, selling, renting, or interested in our leasing and property management services, we are your one-stop shop. You can reach us by telephone at (703) 485-4663, or by E-mail: [email protected]. Helpful tips and information on home buying are available at the Linton Hall, Realtors® website, www.LintonHallRealtors.com.