Congrats on becoming a homeowner. We know you want to get your home customized to your liking, but it is important to keep track of your expenses and finances since your tax situation has now changed. Therefore, today, we are going to provide you with some new homeowner tax deduction tips so you can take advantage of all of the benefits that come with getting a slice of the American dream.
Home Mortgage Interest & Points
This will probably be your largest itemized deduction.
Qualified mortgage interest means that you paid interest on a mortgage, which is secured by your main home or second home that is not used for rental or business activity. You can claim a mortgage interest tax deduction, but it can be limited by the amount of the loan and the use. However, your income does not limit it.
For example, the mortgage interest deduction for a loan that was used to buy, build or improve your home is limited if the loan balance exceeds $1 million ($500,000 for separate tax filers). For home equity loans that were not used for home improvements, the deduction is limited if the loan balance is more than $100,000 ($50,000 for separate filers).
Amounts that are points are also deductible, but only in the year, they are paid and if the loan is secured by the main home and the proceeds were used to purchase, build, or improve the home. The points must be spread over the life of the loan if they were paid in place of amounts that ordinarily stated separately on the settlement statement.
Real Property Taxes
Real property taxes are deducted on Form 1040, Schedule A. In order to be deducted; they have to be assessed as a percentage of the value of the home. In addition, they must go into the taxing authority’s general fund. If they were paid in exchange for a special project that increased the value, they cannot be deducted.
Usually, when they are nondeductible, they will be referred to as “Special Assessments.” An example of this would be an economic development project. In addition, homeowner associated dues are not deductible.
When you pay real property taxes for closing the sale, the deduction is split between you and the seller. You can only deduct property taxes, which are allocated to the part of the year you own the property. If you pay the seller real property taxes, that payment is included in your cost basis and is not deductible.
It is crucial that you track your basis in the property. This is your investment in the property. The points and purchase price and amounts paid as part of the closing. Even if a portion of the purchase price was paid with borrowed money, you need to track it. Your basis increases by amounts paid for home improvement. When you sell the home, your gain on the sale is determined by reducing the sale price by using this basis.
If the IRS challenges the property’s basis, you must be able to provide receipts and invoices.
When you sell the home, the gain is taxed at current at capital gain rates. However, if you reside in the home for at least two years out of five years, you may not be taxed on the gains. Additionally, you may be able to exclude up to $250,000 ($500,000 for joint filers) of the gain from the sale of a principle residence as long as you pass the ownership tests.
Lastly, even if you don’t live in the home for two years, certain circumstances, such as moving for a new job, can help you receive a reduced exclusion.