For those of us who have not yet filed, or those looking to prepare for next year, we wanted to give a BRIEF breakdown on how homeownership and tax deductions work, to help you save the most money!
The BIG TWO Simplified
The two areas where homeowners can save the most are:
Homeowners can deduct interest expenses on up to $750,000 of mortgage debt from their income taxes. Meaning all that money you spent in interest towards the home loan is deductible!
When your home increases in value during ownership these gains are not taxed at the federal level & then you can exclude up to $250,000 in home appreciation when figuring out your capital gains.
By far, the deduction of mortgage interest stands to be one of the best tax benefits. The interest paid on a mortgage of the primary residence can often be deducted on their Federal Income Tax Return. It is possible that you could potentially claim a deduction for any interest that you have paid on mortgages for building, purchasing a home or even a mortgage taken for home improvement, but many different factors can restrict you so it is an absolute necessity to speak with a financial advisor or accountant to be 100% sure on which breaks apply. For example with the new tax bill for 2018 interest paid on HELOCs and home equity loans are no longer tax deductible unless the associated debt is obtained to build or substantially improve the homeowner’s dwelling. The limit for equity debt used in origination or home improvement is $100,000. Also, interest on up to $750,000 of your first mortgage debt is tax deductible!
Deducting Points And Closing Costs:
Upon purchasing a home, it is easy for the consumer to become quite confused with the situation, let alone the handling of settlement charges when it is time to file income tax returns. More often than not, when a consumer takes a mortgage to buy a house, or to refinance their current home loan, the incurring of closing costs will be inevitable. Typically, these closing costs are comprised of fees to process the sale, fees to check the title, Points charged by the lender, fees to have the property appraised, fees to draft the contract, and fees to record the sale. It is important to be aware of the deductibility of these fees, as some could be attributed to the cost basis of the new home, whereas some can be deducted partially or completely on the consumer’s Federal Tax Return. When you take out a mortgage, you are sometimes charged costs by the lender called origination points. 1% of the mortgage taken out equals one point. Most often, discount points can be deducted as long as it is within the year that you bought the home and your deductions are itemized. If you wish to do this, some requirements must be met to ensure eligibility. It is also possible that points may be deducted if they have been paid by the person selling the home.
Home Improvement And Repairs:
Generally speaking, repairs or improvements made on a home cannot be deducted; however, home improvements made can make the house last longer, change it to be acceptable for a different use, or simply increase the home’s value, resulting in the consumer’s home becoming more tax valuable if the improvement is funded through refinancing. Simply by adding features like an additional bathroom, swimming pool or covered porch, consumers can add value to their homes. At the same time, it is quite important to note that the costs associated with maintaining a home cannot be considered to be home improvements and thus cannot be claimed as a tax deduction. If repairs made become extensive thus becoming a remodel, the work performed could potentially be considered a home improvement and eligible for tax deduction. Some locations also offer benefits for improving the energy efficiency of your home. Speak with an accountant to make sure your project is classified correctly and you use the right kind of funding to qualify for any eligible deductions.
When you decide to sell a home, there are other implications to consider in terms of taxes. If the home is sold at a loss, typically it is not possible to claim the loss as a deduction on income tax returns. Upon selling your principal residence and making money on it, it becomes possible to either partially or completely exclude the capital gain from being applicable to being taxable. Capital gain or loss on the sale of the consumer’s primary residence is equal to the subtracted adjusted basis in the property from the sale of the primary residence. The cost of the property is the adjusted basis in addition to any amounts paid in for home improvements, minus casualty losses and property depreciation that have been claimed as income tax deductions. It is also possible for you, regardless of age, filing single, to exclude up to $250,000 of capital gain resulting from the selling of a primary residence from federal income tax upon meeting certain requirements. If you are married and filing a joint return, up to $500,000 can be excluded barring certain requirements are met. Typically, whether you are an individual or filling a joint return with a spouse, this exclusion can only be used every other year. As long as the home has been used at least 2 out of 5 years as the primary residence before the sale took place, the consumer may be eligible for this exclusion.
Where we come in:
We know this is a TON of information, we are here to help if you need it! Reach out anytime and we are always available and ready to assist you. Also if you need a good CPA, we can recommend some of the best in the area!