Tax season is quickly approaching. There are many benefits to homeownership, including some tax deductions you are allowed to take on your income tax returns. In order to deduct expenses of owning a home, you must file Form 1040 and itemize your deductions on Schedule A. Below are some general guidelines taken directly from the IRS publication 530. Here is my disclaimer: I’m not an accountant and I’m not trying to give tax advice, and I cannot guarantee all the information below is 100% accurate. You should always seek an expert opinion to determine the appropriate deductions for your situation. If you need a referral to a CPA, let me know and I’ll point you in the right direction!
DEDUCTIBLE EXPENSES
- Mortgage interest on first or second home loans. Your mortgage company will send you a year end statement for all interest paid during the year (Form 1098)
- Interest paid (up to $100k) on home equity debt, even if not used for home improvements
- Mortgage insurance premiums
- Real estate taxes
- Prepaid interest at closing – This amount should be included in the mortgage interest statement provided by your lender
- Points paid at closing – may be deductible depending on certain requirements. Check with your accountant to see if you qualify
NON-DEDUCTIBLE EXPENSES
- Insurance premiums (other than mortgage insurance)
- Wages paid for domestic help
- Depreciation
- Cost of utilities
- Most settlement charges (closing costs)
- Transfer tax stamps paid at closing – these are not deductible but add to the cost basis of the home for stamps paid by purchaser, and add to the expense of the sale and reduce the amount realized for stamps paid by seller.
- Homeowner’s association assessments – cannot be deducted because the homeowners association, rather than the state or local government, imposes them.
HOME IMPROVEMENTS & HOME REPAIRS
Generally you cannot deduct home repairs or home improvements on your tax return in the current tax year. You can however add the cost of home improvements to the tax basis of your property, which will reduce your total gain (or increase your total loss) when you do sell your home.
Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. Examples of home improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, putting on a new roof, or paving your driveway.
Home repairs maintain your home in good condition. They do not add to its value or prolong its life, and you do not add their cost to the tax basis of your property. You cannot deduct home repairs on your tax return. Some examples of home repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering and replacing broken window panes.
HOMEBUYER TAX CREDITS
On November 6thObama extended and expanded the Homebuyer Tax Credit program. Below are some general guidelines on who may qualify.
First-Time Homebuyers: You may be able to claim a one-time tax credit of up to $8,000 ($4,000 for a married individual filing separately), if you are a first-time homebuyer of a primary residences purchased in the United States after April 9, 2008 and before July 1, 2010. You may also qualify as a first time homebuyer if you did not own any other main home during the 3 year period ending on the date of purchase. This tax credit will phase-out for individual taxpayers with a modified adjusted gross income between $125,000 and $145,000 and for those filing a joint return, it’s between $225,000 and $245,000.
Existing Homeowners: The homebuyer credit may be claimed by existing homeowners who are “long-time residents.” For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that you buy the subsequent principal residence. There’s no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.
KEEPING RECORDS
Keep full and accurate records to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. These records include your purchase contract and settlement papers from your purchase, any receipts, canceled checks, and similar evidence for improvements or other additions to the basis.
All you tax experts out there, did I miss anything worth mentioning????