Tax Benefits

Top Tax Benefits Available for Home-Owners

Pacific Beach Real Estate, Mission Beach Real Estate, San Diego County Real Estate

Are you interested in saving yourself some cash? I mean some pretty mean amounts of cash? Well then, you may want to "listen up!" Here are some basic cash saving ideas on what may be tax deductible items on your federal returns. This article may help you to know some of the many deductions and credits designed to help offset the cost of housing and to keep the market fueled with new homeowners. Here is a brief list of some of the top tax benefits available. You can also visit the Internal Revenue Service's website for more details on each item.

Mortgage Loan Interest

The "Mother of all Tax Breaks", this is the number one tax benefit because interest payments comprise a large portion of your mortgage payment in the early years of the loan's term. Mortgage interest on a maximum of $1 million in mortgage debt secured by a first and second home is deductible. Deductions reduce your taxable income against which your taxes due are calculated. The $1 million level applies to joint tax filers. You get half the deduction if you file single or separately. Likewise, home equity loan interest is deductible, but is limited to the smaller of $100,000 (half as much for each member of a married couple if they file separately) or the total of your home's fair market value as determined by a complicated formula (consult your tax professional for details if this applies to your situation).

Home Improvement Loan Interest

The interest on a home improvement loan is also deductible, but calculated differently. You can deduct all the interest on a home improvement loan provided the work is a "capital improvement" rather than repairs, maintenance or cosmetic upgrades. Capital improvements typically increase your home's value (room addition), prolong its life (new roof) or adapt it to new uses (improvements to assist the elderly or people with disabilities). You get tax benefits from repair work only when you sell your home but you can use a home equity loan to make repairs and deduct the interest -- up to the limits.


Points, each equal to 1 percent of the loan principal, are charged by lenders as part of the cost of the loan. You can fully deduct points associated with a home purchase mortgage, but not a mortgage broker's commission. Refinanced mortgage points are also deductible, but only when they are amortized over the life of the loan. Once you refinance a second time, the balance of the old points from a refinanced loan offer is an immediate write off, as you begin to amortize the new points.

Property Taxes

Property taxes or real estate taxes are fully deductible. Any local city or state property tax refund reduces your federal property tax deduction by the same amount. Also, don´t forget that if you bought property last year, escrow would have prorated the portion of property tax to be paid by each party. Check your closing statements. A purchase also typically results in yet another dreaded tax... this one is the "supplemental" tax bill which can be an often over-looked deductible item. Last, many taxpayers pre-paid the second half of their California property taxes in December which are not due until February 1st... late on April 10th. These are deductible in the year they are paid.

Capital Gains Exclusion

Two issues:
  • Home buying investors' best tax shelter comes from provisions in the Taxpayer Relief Act of 1997 which allows married taxpayers who file jointly to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. The amount is halved for those filing single or separately. You can use this benefit as often as you qualify but not more often than every two years.
  • Until recently, when a spouse died, the surviving spouse had to sell his or her home in the same tax year as the spouse´s death in order to take advantage of the full capital gains exclusion noted just above. Thus, if a spouse died in December, unless the surviving spouse could sell the home by the end of the month, he or she would only be able to deduct $250,000 instead of $500,000 and wind up with a horrendous tax bill upon the sale of the home. If the deceased spouse had just waited until January, the survivor would not have that problem! Recent legislation now permits the surviving spouse to claim the full $500,000 exemption if the home is sold within two years after the date of the spouse´s death.

Home-Based Business Deduction

Homeowners who use a portion of the home exclusively for business may deduct a percentage of costs related to that portion. Included are a percentage of your insurance and repair costs, utility bills, garbage service, water, repairs/maintenance, gardener, pool service, telephone, etc. Under clarified provisions of the Taxpayer Relief Act of 1997, if your home office qualifies, you don't have to allocate a home sale's capital gains between the home and the business.

Selling Costs and Capital Improvements

When you sell your home, you can reduce your taxable capital gain by the amount of your closing and selling costs. Closing costs include real estate commissions, title insurance, legal fees, advertising and inspection fees whereas selling costs are those associated with getting your home ready for sale. These may include decorating or repairs -- painting, wallpapering, planting flowers, maintenance, and the like. These costs are deductible if you complete them within 90 days of your sale and with the intention of making the home more saleable. The way to figure your gain upon sale: Gain is your home's selling price minus deductible closing & selling costs minus your tax basis in the property. Your basis is the original purchase price plus closing expenses at purchase plus the cost of capital improvements you have made to the property.

Moving Costs

A move triggered by a new job comes with some deductible moving costs. To qualify, you must meet certain requirements which include: moving within one year of starting your new job, moving 50 miles farther from your old home than your old job was, and working full-time at the new job for 39 of 52 weeks following the move. Deductions include travel or transportation costs and expenses for lodging and storing your household goods.

Energy Tax Credits

The newest home-based tax credits were made possible by the Energy Policy Act of 2005. Tax credits of up to $500 in 2007 are available for upgrading heating and air conditioning systems, insulation, windows, doors and thermostats, caulking leaks, installing pigmented metal roofs and for otherwise putting the bite on energy waste in your home. Qualified solar energy and fuel cell systems can net tax credits of up to $2,000. Some states also offer tax credits or rebate deals that could reduce the federal credit. Related tax credits are available for consumers who buy alternative- and clean-fuel burning cars. See . If you own a hybrid auto you may also be able to claim a credit of between $250 and $3,400 depending on the type and model purchased.

Mortgage Tax Credits

Mortgage Credit Certificates (MCCs) allow qualifying low income, first time buyers to take a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home. This credit is available every year you have the loan and live in the home. Unlike a deduction which reduces your income, a credit is subtracted, dollar for dollar, from the tax owed.

Ground Rent Payments

This often overlooked deduction does not impact all that many homeowners but if your residence is located on leased land you might be entitled to deduct your ground rent payments. The lease needs to be for at least 15 years, can be freely assignable to a potential buyer of your home, the landowner´s interest is primarily a security interest, and you have an option to purchase the land.

Mortgage Debt Forgiveness

Prior to enactment of the Mortgage Debt Forgiveness Relief Act of 2007, when a lender forgave repayment of a portion of principal and/or interest the borrower owed, the discharged debt was considered to be ordinary income. This new law now allows taxpayers to exclude this amount and thus escape the tax liability.

Mortgage Insurance (commonly referred to as "PMI")

PMI is paid by the borrower but protects the lender when the buyer´s equity is less than 20%. This new law extended what was a one year deduction of mortgage insurance premiums for several additional years and is now allowable for loans originated after December 31, 2006 and before January 1, 2011. The full deduction is available for taxpayers whose adjusted gross income is less than $100,000. By working with your tax professional, you should be able to determine if these or any of the other tax benefits apply to your particular financial situation.

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