Major Tax Credits and Deductions for Homeowners
With tax time approaching, the big mortgage-related issue this year is the homebuyer tax credits. But there are also a lot of other mortgage- and real-estate tax matters to be aware of as well.
Many of these probably won't crop up on your own tax return this year. But it's good to be aware of them, as they could influence the decisions and plans you make as a homeowner in the coming year and beyond.
Homebuyer tax credit
The big one, of course, is the homebuyer tax credit. If you haven't taken advantage of this one yet, you're running out of time - to qualify, you need to sign a home sales contract by April 30, 2010 and close by the end of June.
The credit allows up to an $8,000 credit for first-time homebuyers and a $6,500 credit for repeat buyers, or 10 percent of your home purchase price, whichever is less. This is a tax credit, not a deduction, meaning it comes right off whatever you owe the IRS or increases your refund, if you're entitled to one.
If you did buy a home during 2009, the rules vary, depending on when you made the purchase. For first-time homebuyers, there's an income limit of $75,000 for singles, $150,000 for couples if you purchased on or before Nov. 6. After that date, the limit rises to $150,000 for singles, $225,000 for couples. The credit phases out up to $20,000 above those figures. For repeat buyers, the credit is available only on sales made after Nov. 6.
For purposes of the credit, a first-time buyer is someone who hasn't owned a home in the past three years, while a repeat buyer must have occupied the same home for five of the past eight years. Where couples are involved, the rules can get complicated, so be sure to check with a tax adviser if you're not sure.
Homeowner gains and losses
If you sold your home in 2009 for more than you originally paid for it, you're entitled to keep up to $250,000 in gains tax-free, $500,000 for a couple. That's assuming you owned and lived in the home for at least two of the previous five years, unless you had to move sooner because of your job.
That's also assuming that you were able to sell your home for more than you paid for it - if you took a loss when you sold your home, as many did in 2009, you can't take the loss as a deduction if the property was your residence. That's one of the few situations where the tax law treats investment property more favorably than home ownership - losses on investment property are deductable.
On foreclosures, there used to be a wrinkle in tax law where, if you lost your home to foreclosure, you might have to declare any mortgage debt forgiven in the process as income. However, the Mortgage Forgiveness Debt Relief Act of 2007 exempts most homeowners from this requirement, provided the amount discharged is less than $1 million. However, the law expires after 2012, so foreclosures after that year could once again be subject to the old rule again.
If you purchased a home in 2009, don't forget that you can deduct any points paid at the time of sale - they're considered pre-paid interest. If you amortized the points over the life of the mortgage, you can only deduct what you paid on them each year - points are only deductable in the year they are paid.
Similarly, if you sold or refinanced your home in 2009, don't forget to take a deduction for any points that may have been amortized over the existing mortgage and were paid off at that time. However, if you refinance with the same lender, any remaining points from the old mortgage are re-amortized over the new one and can only be deducted as they are paid off, year by year.
You probably don't need to be reminded to deduct your mortgage interest debt, which can be claimed on mortgages of up to $1 million. But did you realize that you can claim a deduction for interest paid on a second or vacation home as well? The main rule is that you can deduct mortgage interest paid on up to $1 million used to acquire both homes combined - for example, $750,000 on your primary home and $250,000 for a vacation property. You can even deduct payments on a boat as long as it is deemed livable, having sleeping berths, a head (toilet) and a gallery (kitchen).
You can also rent out your second home for up to 14 days a year and not pay taxes on the income. Rent it out for more than 14 days, though, and the rules start getting complicated. All rental income must be declared, though you can also start deducting proportional shares of maintenance costs, depreciation and actual mortgage payments. This is one of those areas where it's a really good idea to talk with a tax advisor before getting involved.
You can also deduct interest paid on up to $100,000 in home equity loans on your first and second homes, on top of the $1 million in acquisition mortgages. However, the combined equity and acquisition loans cannot exceed the market value of your property - so if you have a $250,000 mortgage and $50,000 home equity loan, but the market value of your home has fallen to $275,000, you can only deduct interest paid on $25,000 of the $50,000 home equity loan.
You may be able to exceed the $100,000 limit if you're using the loan to fund home improvements or repairs that will enhance the value of your property. In this case, you may also be able to exceed the market value limit as well, provided the improvements will bring the value up to that point. Again, consult with a tax advisor here.
Home Energy credits
Finally, homeowners can claim certain tax credits for certain energy efficiency or renewable energy improvements or installations. You can claim a credit of up to 30 percent of the cost of installing approved installation or energy-efficient windows, doors, roofing or heating and cooling equipment, to a maximum cost of $1,500. Installations must be complete by Dec. 31, 2010. See the guidelines at www.EnergyStar.gov for more information.
You can also get a tax credit of up to 30 percent of the cost of installing certain "green energy" systems at your home, including solar energy panels or water heaters, small wind turbines, geothermal heat pumps and others.
This is only brief overview of some of the more popular tax breaks available to homeowners. As always, consult with a tax specialist to determine your eligibility for specific credits before making particular improvements or claiming credits you may not be sure of.