Tax implications of owning your home
Q: I am hearing so much about benefits of owning my home. I must confess that I don’t really understand the tax implications. What should I know?
A: Let’s start with two definitions. A tax “deduction” reduces your taxable income. Less income means fewer taxes. For example, a $500 tax deduction reduces your $50,000 taxable income to $49,500. A tax “credit” is a dollar-for-dollar rduction in your actual taxes due. A $100 tax creditreduces your $1,000 tax bill to $900.
There are several home ownership benefits that relate to your taxes. For example, the Mortgage Forgiveness Debt Relief Act of 2007 offers federal tax relief for qualified home owners who pay mortgage insurance. The full amount of their private or government mortgage insurance can be deducted if the insured mortgage originated between 2007 and 2010. Those qualified are families with an adjusted gross income of $100,000 or less. Families with incomes up to $109,000 are eligible for a partial deduction.
Property taxes or real estate taxes are fully deductible. Any local, city or state property tax refunds reduce your federal property tax deduction by an equal amount.
The Energy Policy Act of 2005 provides tax credits of up to $500 for upgrading heating and air conditioning systems, insulation, windows, doors and thermostats, caulking, installing metal roofs and for otherwise putting the bite on energy waste. Qualified solar energy and fuel cell systems can net tax credits of up to $2,000.
Mortgage interest is deductible on a maximum of $1 million in mortgage debt secured by a first and second home. The $1 million level applies to married tax filers who file jointly and single taxpapers. Married taxpayers who file separately split the maximum 50-50. You can also deduct all the interest on a home improvement loan, provided the work is a “capital improvement” rather than repairs, or maintenance.
Refinanced mortgage points are deductible but only when they are amortized over the life of the loan. Once your refinance a secondtime, the balance of the old points from a refinanced loan offer an immediate write off, as you begin to amortize the new points.
Home-based business owners who use a percentage of their home exclusively for business can deduct the same percentage of certain hom-related costs. Included are a percentage of insurance, utility bills, improvements, repair costs and depreciation.
There are several other possible deductions and credits. Those that I mentioned need to be reviewed with your tax professional because there are many factors to consider.
Attorney Sylvia Heldreth is a Certified Specialist in Real Estate Law. Her office is located at 1215 Miramar Street in Cape Coral. This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.