Owning a home is exciting, challenging and the biggest investment of many people’s lives. It’s also a good way to reduce your tax bill.
Home-related tax breaks begin as soon as you close on your new abode and last throughout your time in the house. But to maximize them, you need to follow some rules.
A home isn’t just a house
American homeowners own a variety of types of homes — and the federal Internal Revenue Code recognizes this.
When it comes to tax breaks, your home can be a house, a condominium, a co-op apartment, a mobile home or even a recreational vehicle or boat. As long as it has sleeping, cooking and bathroom facilities, the IRS will allow you to claim several home-related expenses.
Itemizing deductions is the key to saving
Once you own a home, you’ll probably have to change your tax-filing habits. Taking full tax advantage of a property requires most people to itemize instead of using the standard deduction. This means filling out the longer Form 1040 and accompanying Schedule A, where you detail your home-related tax-deductible expenses. Most homeowners find itemizing worth the effort, and plenty of tax software takes the pain out of the process.
There are two key sections of Schedule A that deal with home deductions:
MORTGAGE AND HOME-RELATED INTEREST
Many homeowners’ biggest tax break comes via their monthly mortgage payment, a large part of which goes toward loan interest. As long as your home loan is $1 million or less, all of that interest paid is tax deductible. And if you paid discount points to get a lower loan rate, you usually can deduct those points from your taxes, too.
If you’ve taken out a home equity loan or line of credit, you can generally deduct the interest you paid on that debt. It doesn’t matter if you used the funds on your residence, as long as you received $100,000 or less.
Private mortgage insurance — which you’re likely paying if you didn’t make a 20% down payment — is treated as mortgage interest and thus is deductible, at least for the 2016 tax year. The catch is you can’t deduct it if you have an income greater than $109,000.
In most cases, another portion of your monthly mortgage payment covers your annual property taxes. (Your lender then pays your tax bill.) In others, homeowners pay them directly. Either way, you can deduct these payments as long as you own your residence.
If this is your first year in the house, double check the settlement sheet you received at closing. You probably split the year’s real estate taxes with the seller based on the date of sale. The share you paid will appear on this closing document and it’s fully tax deductible.
No tax on the sale of your home (up to a point)
All those years you spend in your home can provide substantial tax savings. The best tax break, however, is likely to come when you sell.
When single taxpayers sell a primary residence, they can pocket up to $250,000 in profit and not owe any capital gains taxes. The allowance doubles for married couples who file a joint return.
Note that this tax-exclusion amount is based on your profit, not your sales price. You could sell your home for $1 million and still not owe Uncle Sam as long as your profit is no more than $250,000 or, if married, $500,000.
HOW TO FIGURE OUT YOUR HOME’S BASIS
Profit from a home sale is calculated as it is with any other capital asset you sell: Subtract your home’s adjusted basis from the price you got.
For most homeowners, the basis equals the original purchase price plus the value of all capital improvements made to the property. These improvements must add to your home’s value and don’t include routine maintenance and repairs.
Keep track of upgrades to your property. The greater your home’s basis, the lower your sale profit, ideally to a tax-free level. (And even if you do make some taxable profit on your home sale, at least it will be taxed at the lower long-term capital gains tax rate.)
QUALIFYING FOR A TAX-FREE HOME SALE
With such a great tax savings, you might be tempted to become a serial home seller. That could work, but you must meet some requirements in order to qualify for the tax-free home-sale profit.
- The property must be your principal residence. This is the place where you live and literally call home.
- You must own the property for at least two years before you sell it.
- You must have lived in the property for two of the five years before you sell. The good news here is that the residency doesn’t have to be continuous. You could have lived in the house for a year, then taken an out-of-town job posting for three years, before coming back to the home for another year and then selling.
- You can’t have sold a home and avoided the tax on your profit within the two prior years.
Most folks meet these requirements. So in addition to packing your personal belongings onto a moving van, you pack away a nice tax-free check into your bank account.
Team Leader, The Tonnesen Team
Berkshire Hathaway HomeServices, Nevada
3185 St Rose Pkwy #100 Henderson, NV 89052
With over 30 years of experience helping families call Las Vegas "home!"
Related Blog Posts
SELLING A HOME IS HARD WORK! Most homeowners would probably prefer to have a professional licensed Realtor work on their behalf to sell their home, but not everyone sees the value of paying a fee for an agent’s expertise. I get it — it is not easy to recognize all the work it takes to prepare...
We wanted to extend public kudos to HSA Home Warranty Company for going way beyond the expected for a Las Vegas home owner! This week one of our agents, Maxine, who had purchased a warranty for her home, opened her front door to discover that, after a day of 110 degree temperatures, her air conditioning system was comp...
Need a home by the end of the year? This beautiful DR Horton community in the booming southwest area of Las Vegas has immediate move-ins on brand new homes! The neighborhood includes its own private park and a community pool, and homes come standard with granite countertops and low E windows. Check out this stand...
It's not as easy as it looks on TV Key Takeaways: A real estate agent's job is to make sure everyone else involved in the transaction is doing their job. Agents have to continually shift gears to quickly adapt and respond to customer needs. What does a real estate agent do? Oh, where t...
Buying a house can be both an exciting and simultaneously stressful experience. One reason the home buying process tends to be so stressful for many consumers — besides the fact that it’s probably the biggest purchase you’ll ever make — is the rigorous qualification process involved in gett...