By Michael Lodge
Many of our clients own homes but still remain unsure of what tax deductions they can take as a homeowner. So in this blog we are going to go over some of the many deductions that are available to homeowners.
The tax law is always being revised by Congress, sometimes providing tax breaks for homeowners. And on the other side they also have a habit of canceling other tax breaks away or allow them to expire at the very same time. Congress giveth and taketh. Some of the tax provisions to keep track of if you own a home or property should include:
From an article by NoLo, Llona Bray, J.D.
TAX CREDIT OR TAX DEDUCTION: WHAT IS THE DIFFERENCE? A tax deduction reduces your taxable income. Example, a $1,000 tax deduction reduces your $50,000 taxable income to $49,000. Lower taxable income means less taxes to pay on April 15th.
A tax credit is an even better situation. It’s a dollar-for-dollar reduction of the actual taxes due. So, a $1,000 tax credit reduces a $1,000 tax bill to zero. If the tax credit is what’s called “refundable”, you don’t owe any taxes, you get a $1,000 tax refund. (however this is the only situation in which you’d get a check from the government: contrary to popular opinion, this is not a “rebate.”)
ENERGY-RELATED TAX CREDITS: Homeowners who install solar, geothermal, or wind systems to generate electricity, or in some cases hot water, are eligible for a tax credit worth 30% of the cost of the system, with no upper dollar limit. One could take this credit against the Alternative Minimum Tax (AMT). It’s also good for purchases made in 2015. The credit expires at the end of 2016 with respect to geothermal and wind systems. For solar it is available at 30% for the tax year 2020; then reduces to 22% for tax year 2021; then expires on December 31, 2021.
Another tax credit rewards homeowners (of first or second homes) who install a fuel cell system to generate electricity, either in 2015 or 2016. They receive a tax credit of 30% of the cost, with no upper limit. The credit can be used either for an existing home or one being newly constructed. This credit is also due to expire at the end of 2016.
Tax credits for qualifying energy-efficient home improvements are also available until December 31, 2016 for insulation, heating and air conditioning equipment, heat pumps, water heaters (non-solar), roofing, doors, windows, and skylights, and biomass stoves. The credit is worth up to 10% of the cost of the improvements, up to $500. It can be used for purchases made in 2015.
Taxpayers can claim such credits using IRS Form 5695 Residential Energy Credits. For the latest information on eligibility and expiration dates, see the Energy Star website.
Tax Break for Defaulting HomeownersOrdinarily, debt that is forgiven by the lender is counted as income to the person who is no longer required to repay the debt. Under the Mortgage Forgiveness Debt Relief Act of 2007, however, homeowners whose lenders have forgiven their mortgage debt received a tax break–the amount of the forgiven debt was not counted as income for tax purposes, up to a $2 million limit. Congress has extended this to the end of 2016. And if an agreement to discharge the debt is signed in 2016, the exclusion can be taken in 2017.
Tax Credit for First-Time and Longtime, Repeat HomebuyersThe Worker, Homeownership, and Business Assistance Act of 2009 aimed to bring some relief to the housing crisis. Among its provisions was a fully refundable tax credit of up to $8,000 for some first-time homebuyers and up to $6,500 for certain returning homebuyers. Unfortunately, the law has expired, but we’ll summarize its provisions here; especially for people who need to double check that they won’t eventually have to pay the money back.
Definition of first-time homebuyer. For purposes of the tax credit, “first-time homebuyer” means someone who has not owned a principal residence (that means a home you live in) for the past three years. For married couples, the test applies to both: Neither can have owned a home within the previous three years.
Definition of repeat homebuyer. This means someone who has owned and lived in the same home for at least five consecutive years out of the last eight. For married couples, the test applies to both.
Eligible home purchases. The tax credit is available for homes bought by either first-time or returning buyers on or after January 1, 2009 and before April 30, 2010 (meaning you must have entered into contract by that April date and closed the purchase by September 30, 2010, after an extension of the original June 30 deadline). The home MUST cost less than $800,000.
Determining the amount of the tax credit. The first-time buyer tax credit was 10% of the purchase price, but capped at $8,000. The returning buyer tax credit was 10% of the purchase price, but capped at $6,500.
Income eligibility for the tax credit. If your sale took place after November 6, 2009, you were eligible for the full tax credit if:
You may have been eligible for a partial tax credit if:
Note that if you sell the house or stop using it as your primary residence within 36 months of the purchase, you must pay back the credited amount.
The income limits under a previous version of this law were significantly lower and still applied to people who bought their houses after January 1, 2009 but on or before November 6, 2009. These limits were $75,000 for singles (with a phaseout, partial credit available up to $95,000) and $150,000 for couples who are married and filing jointly (with a phaseout, partial credit available up to $170,000).
Congress has also passed more than one extension of a tax deduction for private mortgage insurance (PMI), which was originally set to expire in 2007. The extension currently allows eligible homeowners (who own the home as a primary residence or a second home that’s not a rental) to deduct the cost of their mortgage insurance premiums through 2016.
What is mortgage insurance? Lenders require borrowers to purchase PMI if the borrower’s down payment is less than 20% of the purchase price and other loans are not used to make up the difference. The reason is that mortgages with down payments of less than 20% are deemed riskier than loans with larger down payments. Although the mortgage insurance protects the lender, the homeowner must pay the premiums, which are based on the price of the home.
Who qualifies for the deduction? Home-owning families with an adjusted gross income of $100,000 or less qualify for the full deduction. Families with incomes up to $109,000 are eligible for a partial deduction. Any household income higher than that, and the deduction becomes unavailable. 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.
Second-Home Tax-Break Loophole ClosedUnder current law, homeowners can exclude from taxation a certain amount of the gains from a home sale, provided the property was the primary residence for two out of the previous five years. The maximum exclusion is $250,000 for a single person and $500,000 for a married couple filing jointly.
In past years, vacation and rental property owners figured out that they could legally double dip the exclusion by first selling their primary residence and avoiding tax on the capital gain. Then, after moving into the second home for two years to qualify it as their primary residence, they could sell the home and avoid paying taxes on the full amount of the capital gains earned on the second home.
This legal means to double dip ended on January 1, 2009. After that date, if you live in a home that you’ve also used as a vacation or rental home, you do not get tax relief on the capital gains earned while you did not live in the home. You can, however, get tax relief on the capital gains earned while you are using that home as your primary residence.
Example: Bob owns a vacation home for ten years. During the last two years of his ownership, he uses the vacation home as his primary residence. He sells the home and gets a $100,000 gain. Under the new law, $80,000 of that gain would be subject to capital gains tax (equal to the eight years the property served as a vacation home). The remaining $20,000 would qualify for the tax exclusion (equal to the two years he used the home as his primary residence).
Homeowners who moved into their vacation home before the end of 2008 will still be eligible for the benefits of the old law. For more information, see IRS Publication 523, Selling Your Home, available from the IRS website at www.irs.gov.
If you have a tax question please send it to: firstname.lastname@example.org
Thank you to NoLo, Llona Bray, JD who wrote this piece.