Few things can impact your tax bill like owning a home. And if you’ve been busy shopping, choosing, buying, and closing on a house, we’re going to bet that you forgot all about this pot of gold at the end of the rainbow.
Homeowners, you may have big tax deductions coming your way
When you purchase a home, items such as mortgage interest and origination points become tax deductions, Scott Cummins, Production Manager and Senior Loan Officer at Cornerstone Home Lending, Inc., explains. “For a majority of the buying public, that means a drop on your taxable income of several thousand dollars and an overall reduction in your annual IRS Tax Bill,” he says.
If you’re a renter, there is a catch. You may not be able to take advantage of many of these tax savings items. Cummins adds, “But your landlord can!”
What kind of juicy tax write-offs are we talking about? While it’s important for you to check in with your tax advisor to confirm if you qualify, we can think of at least seven tax breaks that may benefit new homeowners:
- Mortgage interest payments. We’re keeping this biggie – what is probably the most well-known tax break among homeowners – at the top of the list. For the most recent tax year, TurboTax confirms that “it pays” to deduct your mortgage interest. In most cases, residential mortgage interest (and the interest on a second home) may be fully deductible. First-time home buyers or previous homeowners who haven’t owned a primary residence in the past three years may also qualify for the Mortgage Credit Certificate (MCC), which can vary by state. An MCC offers you a dollar-for-dollar tax credit that can lower your federal income tax liability. If eligible, you’ll get back a 20 percent credit on the annual mortgage interest you pay every year you live in your house.
- Loan points.Settlement charges for loan points may also qualify as a write-off. One loan point is equivalent to 1 percent of your home loan, and it counts as paying your mortgage interest upfront. Prepaid loan points, along with loan origination fees, can be deducted in your taxes for your year of purchase. To take advantage of this new homeowner perk, you may need to meet IRS requirements. (As a note, you may also get a better mortgage interest rate over the life of your loan when you pay these loan fees and points upfront.)
- Moving expenses.Part of buying a new home is moving, and thank goodness moving expenses are also often tax-deductible. If you want to get the break, here is the hoop you must jump through: The distance between your new job and old home must be at least 50 miles more than the distance between your old job and your old home to qualify. You can qualify as a homeowner or renter – allowing you to deduct the expense of moving your family and your belongings, factoring in for lodging but not meals.
- Home office.This may have been why you wanted a bigger home in the first place: So you can have extra space to work from home, run your business, schedule appointments, or keep records. If that sounds like your home office situation, you may be able to deduct a number of household expenses, like utilities, cleaning, insurance, repairs, and depreciation. These deductions will be based on the square footage of your home office and may count even if your day job takes place in another office location. IRS home office tax deduction requirements can be found here, though it helps to meet with your lender or accountant to answer specific questions.
- Gains.This is what happens when you sell one home and buy another. You may be given the opportunity to protect the profits on the sale of your home, if it was used as your principal residence for two of the past five years. Protection may be available for up to $500,000 in tax-free profit if you are filing federal taxes jointly, dropping down to $250,000 in profit if filing single. Tax-sheltering the profits on your home is a “bonus” you may be eligible for once every two years.
- Home equity loans.Taking out a second mortgage or equity credit line means you’re borrowing against the value of your home, and this kind of loan can provide a tax break too. Home equity loan interest may be fully deductible at up to $100,000, no matter what you decide to use the money for. Compared to other lines of credit, home equity loans can offer certain tax advantages, confirms the FTC. But there is fine print: If you’re adding to any other debt attached to your residence, the home equity loan cannot exceed 125 percent of the fair market value of your house.
- Debt payoff.As stated by the FTC, a home equity loan may offer better tax breaks than other loans, including credit card and car loan interest that normally isn’t tax-deductible. If you want a bigger and better tax break, as most of us do, you may choose touse a home equity loan to pay off your personal debt. Then, you can deduct the interest.
You just bought a house: Here’s what to do next
We tell this to our buyers time and again: Always get your questions answered first.
There’s nothing worse than leaving an item off your tax return when you don’t understand the deduction you have coming to you. Kiplinger estimates that many of us are missing out on cost-cutting tax breaks – that include moving expenses, refinancing points, energy-saving home improvements, and more – just because we fail to claim. Ask your lender, ask your accountant, and get to the bottom of your tax questions so you can get your savings.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.