Home Tax Deductions

Some of the most frequently discussed benefits of buying and owning a home are tax deductions. Taxes are one of those mild irritants that make you think of Chinese water boarding or a blister at the start of a marathon. Unfortunately, we all have to pay them so figuring out ways to pay less or even get a tax refund are usually drifting somewhere at the edge of our thoughts.

Tax Credits vs. Tax Deductions:

Before getting familiar with the tax benefits of home ownership, you will want to know the difference between a tax credit and a tax deduction. A tax credit is an actual dollar for dollar reduction of your total tax bill. So if you've calculated your tax bill and you owe $500, a $200 tax credit will reduce your bill to $300.

A tax deduction, on the other hand, is applied to your taxable income. Therefore if you have $50,000 in taxable income and you get a $5,000 tax deduction, you now only pay taxes on $45,000 of income.

Energy Tax Credits:

A variety of energy related tax credits are offered to home owners. For instance, if you install geothermal, solar or wind systems to generate electricity you can receive the Residential Energy Efficient Property Credit, which is worth 30% of the total cost of the system.

You can also take advantage of The Nonbusiness Energy Property Credit, which offers incentives to homeowners who make energy efficient improvements such as new windows, updated furnace and insulation. The credit is worth 10% of the cost of the improvements and has a lifetime limit of $500.

Mortgage Interest:

Each month a hefty portion of your mortgage payment will be interest. Fortunately, that interest can all be deducted from your taxes. This deduction also applies to interest paid on home equity loans and lines of credit.

Points:

If you paid points to get a better mortgage rate, you can deduct the points in the year that you paid them. The points must have gone towards a loan for your primary home. You can also deduct points paid on home refinances; however, the points must be deducted over the life of the loan rather than in a single year.

Property Taxes:

Many homeowners pay their taxes into an escrow account that is part of their monthly mortgage. Whether you do this or pay your home's taxes in a lump sum each year, this cost is deductible. If you do pay your taxes into an escrow account, you can find out the total on the annual statement from your lender.

Avoiding Capital Gains Taxes:

When you sell your home it may be subject to Capital Gains Tax. However, if you have owned and lived in the home for two years you can profit up to $250,000 from the sale of your home and not pay these taxes. Another way to avoid paying capital gains tax is to use the profit from your home to purchase a new home using a 1031 Exchange.

If you have questions about homeowner related taxes, please feel free to contact me at MyRealtorRob.