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Top
10 Tax Breaks, On The House
by Broderick Perkins
The
New Year always turns thoughts to the new tax season
and when it comes to taxes there's no place like home
to find shelter.
Your
home offers a score of tax deductions and credits designed
to help offset the cost of housing and to keep the housing
market fueled with new buyers.
Some
federal-level politicians would like to separate you
from some of those benefits and they may or may not
be successful, so take advantage of them while you can.
Here's
a look at the Top 10 Tax Breaks, On The House. Visit
the Internal Revenue Service's website for more details
on each item.
* Mortgage Loan Interest:
The Mother Of All Tax Breaks, because interest payments
comprises a large portion of your mortgage payment in
the early years of the loan's term, mortgage interest
on a maximum of $1 million in mortgage debt secured
by a first and second home is deductible. Deductions
reduce your taxable income against which your taxes
due are calculated. The $1 million level applies to
married tax filers who file jointly and single taxpayers.
Married taxpayers who file separately split the maximum
equally.
Likewise, home equity loan interest is deductible, but
limited to the smaller of $100,000 (half as much for
each member of a married couple if they file separately),
or the total of your home's fair market value as determined
by a complicated formula you may need a tax professional's
help to decipher.
* Home Improvement Loan Interest:
The interest on a home improvement loan is also deductible,
but calculated differently. You can deduct all the interest
on a home improvement loan provided the work is a "capital
improvement" rather than repairs, maintenance or
cosmetic upgrades. Capital improvements typically increase
your home's value (say, because you added a room), prolong
it's life (a new roof) or adapt it to new uses (universal
design improvements to assist older people or people
with disabilities). You get tax benefits from repair
work (painting, repairing, etc.) only when you sell
your home but you can use a home equity loan to make
repairs and deduct the interest -- up to the limits.
* Points: Points, each
equal to 1 percent of the loan principal, are charged
by lenders as part of the cost of the loan. You can
fully deduct points associated with a home purchase
mortgage, but not a mortgage broker's commission. Refinanced
mortgage points are deductible too, but only when they
are amortized over the life of the loan. Once you refinance
a second time, the balance of the old points from a
refinanced loan offer an immediate write off, as you
begin to amortize the new points.
* Property Taxes: Property
taxes or real estate taxes are fully deductible. Any
local city or state property tax refunds reduces your
federal property tax deduction by the same amount.
* Capital Gains Exclusion:
Home buying investors' best tax shelter comes from provisions
in the Taxpayer Relief Act of 1997 which allows married
taxpayers who file jointly to keep, tax free, up to
$500,000 in profit on the sale of a home used as a principal
residence for two of the prior five years. The amount
is halved for those filing single or separately. You
can use the benefit as often as you qualify.
* Home-Based Business Deduction:
Home offices that use a portion of your home exclusively
for business could qualify you to deduct a percentage
of costs related to that portion. Included are a percentage
of your insurance and repair costs, utility bills and
depreciation. Under clarified provisions of the Taxpayer
Relief Act of 1997, if your home office qualifies, you
don't have to allocate a home sale's capital gains between
the home and the business.
Previously if you used, say, 10 percent of your home
for a home-based business, 10 percent of the gain from
a sale would be subject to capital gain taxes and you
couldn't use the capital gains tax exclusion on that
portion. The clarified provision does not excuse you
from a recapture tax if you've taken a depreciation
deduction because of the home-based business.
* Selling Costs and Capital Improvements:
When you sell your home, you can reduce your taxable
capital gain by the amount of your selling costs, which
include real estate commissions, title insurance, legal
fees, advertising and inspection fees. Cost typically
stemming from decorating or repairs -- painting, wallpapering,
planting flowers, maintenance, and the like -- are also
selling costs if you complete them within 90 days of
your sale and with the intention of making the home
more saleable.
Selling costs are deducted from your gain. Gain is your
home's selling price, minus deductible closing costs,
minus selling costs, minus your tax basis in the property.
Your basis is the original purchase price, plus the
cost of capital improvements, minus any depreciation.
* Moving Costs: A move
triggered by a new job comes with some deductible moving
costs. To qualify, you must meet certain requirements
including, moving within one year of starting your new
job, moving 50 miles farther from your old home than
your old job was and working full-time at the new job
for 39 of 52 weeks following the move. Deductions include
travel or transportation costs and expenses for lodging
and storing your household goods.
* Mortgage Tax Credit:
Mortgage Credit Certificates (MCCs) allow qualifying
low-income, first-time home buyers to take a mortgage
interest tax credit of up to 20 percent (the amount
varies by jurisdiction) of the mortgage interest payments
made on a home. This credit is available every year
you keep the loan and live in the house purchased with
the certificate. Unlike a deduction that reduces your
income, the credit is subtracted, dollar for dollar,
from the income tax owed. For example, with a 20 percent
tax credit, if you paid $10,000 in interest, your tax
credit would be $2,000. If you owe $2,000 in income
taxes without the credit, you would end up owing nothing
to the IRS after the credit was applied. The remaining
80 percent of your mortgage interest -- $8,000 -- is
taken as a normal mortgage interest deduction.
* Energy Tax Credits: The
newest home-based tax credits were made possible last
year by the Energy Policy Act of 2005. Tax credits of
up to $500 in 2006 and 2007 are available for upgrading
heating and air conditioning systems, insulations, windows,
doors and thermostats, caulking leaks, installing pigmented
metal roofs and for otherwise putting the bite on energy
waste in your home. Qualified solar energy and fuel
cell systems can net tax credits of up to $2,000. Some
states also offer tax credits or rebate deals that could
reduce the federal credit. Related tax credits are available
for consumers who buy alternative- and clean-fuel burning
cars and for entrepreneurial consumers who install clean-fuel
vehicle refueling property at the principal residence
of the taxpayer.
Published:
January 11, 2006
Bend Home Sales, LLC
John Melton
Broker / Consultant
Direct: 541.350.6500
Email: John Melton
Everything
about Bend Oregon Real Estate!
© 2006 BEND HOME SALES, LLC
All rights reserved.
Disclaimer:
All information provided is deemed reliable but is
not guaranteed and should be independently verified.
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