For millions of taxpayers, the best tax breaks available come courtesy of the roofs over their heads.
Most homeowners are well aware of the many tax benefits their residences offer. But a few new wrinkles were added to the tax code recently. And a little tax refresher never hurts.
First, here are a couple of quick notes:
- To take advantage of most home-related tax benefits, you'll have to itemize your deductions on Schedule A.
- In the eyes of the IRS, a house can be a single-family residence, a condominium or cooperative apartment, a mobile home, a boat, a recreational vehicle or any similar property that has sleeping, cooking and toilet facilities.
Now to your home's tax-saving opportunities.
This is one of the most popular tax deductions around. A homeowner can deduct all interest paid on a mortgage as long as the loan doesn't exceed $1 million. Even better, the deduction doesn't end with your first home loan. Interest on a second property is also deductible. In this case, the combined loan amounts must fall under the $1 million ceiling.
Interest on a second mortgage on your principal residence, a home equity loan or a home equity line of credit also might be deductible. In most cases, equity debts of $100,000 or less are fully deductible.
A loan point is 1% of your loan amount. Points are usually paid in order to obtain a more favorable loan rate. In most cases, any points you pay on the purchase of your principal residence are considered mortgage interest and are fully deducible in the year paid. Even points paid by the seller are deductible by buyer.
Points paid for other home-related debt, such as an equity loan, also may be deductible, but over the life of the loan. An exception is if part of the refinanced mortgage proceeds are used to improve your main home; then you can fully deduct the part of the points related to the improvement in the year you paid them.
Property taxes are the other major tax deduction for homeowners. All real estate taxes, regardless of which jurisdiction imposes them, are fully deductible. Unlike the mortgage interest deduction, which is limited to two residences, the property tax deduction is allowed for the amounts you pay on all your personal real-estate holdings.
Some specific home improvements could help cut your tax bill. Some medically necessary changes to your residence, such as installing ramps and widening doorways to allow wheelchair access, could be deductible. Eligible costs would be reported on Schedule A as itemized medical expenses. Details on such deductible structural changes are detailed in
Medical and Dental Expenses
Home Sale Exclusion
Even if you can't deduct home improvements when you make them, keep track of the costs. If you're able to get top dollar for your home, the information could help reduce the amount of taxable gains.Most sellers, however, won't have to worry about whittling down their profit amount, since the tax code offers a generous break in this regard. A home sale profit of up to $250,000 is nontaxable for single filers; the nontaxed amount is double that for a married couple fling a joint return. There are two requirements to get this tax savings: The house must be your principal residence for two of the last five years, and you can claim this tax break only every two years.
Private Mortgage Insurance
In some cases, private mortgage insurance (PMI) premiums paid during 2007 are considered mortgage interest and therefore are deductible on Schedule A. The PMI must be paid on a home loan obtained in 2007. Also, if your adjusted gross income is more than $100,000 ($50,000 if married filing separately), the amount of deductible PMI premiums are reduced and may be eliminated. This deduction also applies to eligible PMI payments in 2008 through 2010.
Forgiven Mortgage Debt
Some homeowners whose mortgage debt was partly or entirely forgiven may be able to claim special tax relief. Usually, canceled debt is considered taxable income. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude debt forgiven on their principal residence if the loan balance was less than $2 million ($1 million for a married person filing a separate return). This new law applies to transactions from Jan. 1, 2007, through Dec. 31, 2009. To claim forgiven mortgage debt relief, file
with your personal tax return.
Kay Bell, a free-lance writer and editor in Austin, Texas, has been writing about taxes for a decade. She has two tax blogs, Don't Mess With Taxes and Eye on the IRS.