With the increase in real estate activity last year, there are a number of new homeowners out there looking forward to reducing their tax liability with the deductions that come along with their investment.
Whether you purchased a single-family home, paired home, townhome, condominium or any other roof over your head, here’s a rundown of the more common deductions associated with homeownership (this is a compilation of current tax issues in the news – you should consult a tax professional for tax advice – deductions depend on a variety of factors).
If you moved residences in 2013, certain expenses that meet specific IRS criteria can be deducted from your taxes:
The IRS only allows you to write off your moving expenses if the move is for job-related reasons. If you moved for personal convenience, you do not qualify for this deduction.
The IRS requires that you be employed full time for 39 weeks of the first 12 months of your move in the area of your new job location in order to qualify for moving deductions. In addition, the commute from your old home to your new job location must be at least 50 miles longer than your commute from your old home to your old job.
Also, if your employer paid any portion of your moving expenses, it will impact what you are able to deduct from your taxes.
If you meet the qualifications, the IRS has a short list of allowed moving deductions. Review your receipts for the following:
• Cost of packing and transporting household good and personal effects, whether you moved yourself or hire professional movers.
• Cost of insurance for your move.
• Costs to connect and/or disconnect utilities because of the move.
• Cost of one-day's lodging expense at your old residence after your belongings have been moved.
• Cost of storing your belongings at a location that is not your old residence. This applies to storing belongings with a family member or in storage in another city where you had lived previously.
• Cost of storing your belongings for no more than 30 consecutive days after the move.
• Cost of one trip for you and your household members.
• Costs of car travel - you can deduct your expenses for gasoline, oil, lodging parking fees and tolls.
The following deductions generally apply to all homeowners:
Mortgage Interest Deduction - homeowners who itemize their deductions can deduct the interest paid on a mortgage with a balance of up to $1 million.
Property Tax Deduction - while it may sound strange to have a tax-deductible tax, the overall effect is that you don’t pay income tax on money that was spent on property taxes.
Home Improvement Loan Interest Deduction - the interest on home equity loans used for capital improvements to your home may be tax deductible. Improvements that add square footage, upgrade necessary components or repair damage from a natural disaster typically qualify, while routine maintenance like replacing carpet or painting usually do not.
Private Mortgage Insurance (PMI) Deduction - homeowners who make a down payment of less than 20 percent are usually paying some sort of PMI. If your mortgage was originated after Jan 1, 2007, and you have PMI, it can be a tax deduction. The deduction is phased out, 10 percent per $1,000, for taxpayers who have an adjusted gross income between $100,000 and $109,000 and those above that level do not qualify. This deduction won’t be available next year unless Congress renews it for 2014.
Mortgage Points/Origination Deduction - homeowners who paid points (origination fees) on their home purchase or refinance can often deduct those points. On a home purchase loan, taxpayers can deduct the entirety of points paid in the same year. On a refinance loan, the points must be deducted as an amortization over the life of the loan. Many taxpayers forget about this amortized benefit over time, so it’s important to keep good records on the deduction of points on a refinance.
Energy Efficiency Upgrades/Repairs Deduction - homeowners can deduct the cost of building materials used for energy efficiency upgrades to their home. This is actually a tax credit applied as a direct reduction of how much tax you owe, not just a reduction in your taxable income. Ten percent of the total bill for energy-efficient materials can be used as a tax credit, up to a maximum $500 credit. Insulation, doors, windows, new roofs, HVAC, water heaters and other items qualify for the energy efficiency credit with individual limits on some items.
Profit on Sale of Real Estate/Real Estate Selling Cost Deductions - individuals can claim up to $250,000 of profit from the sale tax-free and married couples can claim up to $500,000 tax-free on a primary residence (you lived in the home for two of the past five years). If your profits exceed these limits, some of the costs associated with selling the home may be claimed as tax deductions.
When it comes to other items, such as the Home Office Deduction, Home Improvements for Medical Care or the Loan Forgiveness Deduction, each individual situation will determine qualification as well as the amount of a deduction. In addition, two common misconceptions about deductions include depreciation, general closing costs, dues to a homeowners association and insurance (PMI requirements have certain loan limits while property hazard insurance premiums have always been excluded). You cannot deduct these for a personal residence.