by Jeff Reeves | March 11, 2013 11:51 am
While economists and investors can debate whether buying a home is still part of “the American dream,” it’s undeniable that the tax code remains highly favorable to people who own instead of rent.
And whether you were a first-time buyer who made the plunge in 2012, a long-time homeowner who refinanced or a seller who has left your house behind, there are a host of important deductions available to you.
In fact, the easiest way for a family to get more than just the standard deduction from the Internal Revenue Service is to claim tax breaks related to a house. Charitable deductions or a smattering of healthcare costs might not get you above the $5,950 deduction for individuals or the $11,900 mark for married couples. But just a few of these big-time breaks can push you over the top and result in a much bigger tax return.
Of course, the downside is no more simple tax returns, because you’ll have to itemize. But the money you’ll get back from the IRS makes it worthwhile.
Here are seven important tax tips for homeowners to ease the process:
Mortgage Interest Is Your Best Friend: Taxpayers collectively get about $100 billion in annual mortgage interest breaks. If you just bought a home or refinanced in the last few years, the savings are even more significant since more than half of your monthly payment goes towards interest.
Mortgage Insurance Is Still Deductible: There were fears that the deduction of personal mortgage insurance would disappear because of recent fiscal fights in Washington. However, Congress thankfully left it in place — which is a huge boon to lower-income homeowners who often can’t afford a big down payment and thus must pay PMI until they have at least 20% equity in their home.
Property Taxes Are Tax-Deductible: It sounds odd and is frequently overlooked, but homeowners can deduct their local and state property taxes on federal tax returns. There also might be special property tax benefits for lower-income homeowners based on your state or municipality of residence, so look into further breaks specific to your community.
Qualified Renovations Count: Fixing a leaky faucet or putting crown molding in the living room is not tax-deductible. But there are a number of items in the tax code that allow for tax breaks and credits. A host of items covered under residential energy efficiency can provide tax relief, including new solar panels or certain water heaters. There are also deductions that can be made for home office improvements, as well as write-offs for medically necessary changes such as an entry ramp or a handicap-accessible bathtub.
Unqualified Renovations Can Count Later: While that new addition you built may not be “necessary,” the expense could be an important part of reducing your tax burden when you sell. This is especially noteworthy in hot real estate markets or for homeowners sitting on big property appreciation. The IRS allows you only $250,000 of profit when you sell a primary residence, but you can deduct any renovations that boosted your home’s value from any total profit to get under that threshold. So find those receipts if you’re sitting on a big profit and planning to sell.
Claim Selling Costs, Too: If you sold a home in the past year, costs including title insurance, advertising and real estate broker fees can also be claimed on your tax return. You can even claim certain repairs to reduce your capital gains on the sale, presuming they were made within 90 days of the sale and clearly for the intent of marketing the property.
Don’t Forget Moving Expenses: If you bought a home in 2012, there’s a chance that you did so because of a job-related move. If this is the case, you might be able to deduct some of those expenses, provided you have the receipts for all of your moving costs. Keep in mind you have to have moved 50 miles or more, and the reasons for your move can’t be personal.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.
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