Tax Deductions for Home Owners - Research Paper Example

Tax deductions for home owners The house market has improved drastically in some regions of the USA allowing more people to become home owners. Along with the joy of owning a new home comes many tax deduction benefits right from the time you buy it to the time one may decide to sell. The following are some of the tax benefits of owning a home. Mortgage Interest Any interest paid on the mortgage is tax deductable but within limits. This means that a home owner can deduct all the interest payments on a maximum of $1 Million debt for a mortgage secured by a first or second home. This is for a married couple who are filing jointly. If filing separately, each party is entitled to claim interest of up to $500,000. If the house was fully paid for, the owner is not allowed to later take loan with the house as the collateral and deducting the interest on the home equity loan. If the bank requires a home owner to buy private mortgage insurance, the premiums are tax deductable for the mortgages taken out as from 2007 to 2010. The amount of income is what determines the amount of the deduction scaled back. If a person earns more than $100,000 annually, the deductions will start to become less with the rise of your income (Fishman, 2015). The IRS (Internal Revenue Service) will limit your deductable interest if you own a house more than a million dollars mortgage. For those who own multiple properties, mortgage interest is also deductable for the second home. The second property does not have to be strictly a house. It could be a boat or a recreational vehicle (RV) so long as it has cooking facilities, sleeping area and a bathroom. This second property can even be rented out for a part of the year and still enjoy the full advantage of deduction on the mortgage interest as long as the owner will spend sometime there. The IRS could however consider the second property a residential rental property and cut the deductable interest if the owner does not vacation there for at least 14 days or more than 10% of the number of days rented out (Fishman, 2013). Points The mortgage lender charges a variety of fees referred to as pints. It is necessary to understand the point system that mortgage lenders often use. One point is equivalent to 1% of the principal of the loan which can add up to thousands of dollars. Fees amounting to one to three points on a home are quite often seen. The fees are part of the income tax deductions list and one can enjoy the benefit of full deductions as long as they are associated with the purchase of a home. If the owner is refinancing a home mortgage, the points are still fully deductable (Dolan et al, 2013). However, this has to happen over the life of the loan and not upfront. The remainder of old points can be written off by those who refinance their homes and start to amortize the new. The rule is the same for home equity loans or lines of credit. If the loan money is used on the house securing the loan then the points are deductable in the period the loan is taken out. The IRS will allow a home owner to deduct points in the year they are paid for but only if the loan is to purchase or build the main home. The payments of points should be an established business practice in the area and the points within range. All points paid on a loan for a second property such as a vacation home, regardless of how the loan is used, it must be amortized over the life period of the loan (Dolan et al, 2013). Equity loan interest Even if some people can deduct some interest paid on a home equity loan, or line of credit, the IRS limits the amount of debt considered home equity for this deduction. A home owner is allowed to deduct the smaller of $ 100,000 if filing jointly with a spouse or half of that amount if filing separately for every partner. Or the home’s total market value minus certain homes’ outstanding debts (Fishman, 2013). Home improvement loan interest A home owner can deduct the interest with no dollar limit if the loan is taken out to make substantial home improvements. The owner however needs to have evidence that loan taken out is for capital repairs and not ordinary home repairs. Capital improvement entails activities that increase the value of the home, prolong its life or adapting it to new uses. This could be adding a new roof, a new fence, constructing a swimming pool, adding a garage, insulation system, landscaping, adding a porch and such like involving activities that require a lot of financing (Brauner & Stewart, 2013).. The owner should be careful not to increase the square footage of the home as it could lead to a reassessment and therefore higher property taxes. Activities that do not qualify as capital improvements and therefore not eligible for capital deductions include repainting, replacing broken or cracked tiles, fixing minor leaks, patching the roof or putting on wallpaper. Property taxes They are popularly known as real estate taxes. These are fully deductable from the income. If the owner has an escrow or an impound account, one is not allowed to deduct escrow money held for property taxes until the time the cash is used to pay for the property taxes. It is also worth noting that a state or city property refund tax reduces the federal amount by a similar amount. It is not possible to claim an interest deduction until the money is taken out of an escrow account and paid (Brauner & Stewart, 2013). Home office deduction If a portion of the home is used exclusively for business related activities, it is possible to deduct home costs linked to that part of the property. For example a percentage of the insurance, cost of repairs and depreciation. The IRS recognizes two incidences where an owner can claim a home office deduction. One is when a portion of the home is used exclusively or regularly as the main place of business, or a meeting place for clients where deals are made (Lasser, 2013). Also could be where patients are met. If it is a spate structure attached to the home, this means that the exclusive or regular use must not be the principle place of business. On the other hand, part of the home is used regularly for storage of material used for business such as inventory or samples of a product. Also included in this, are the home day care facilities. Selling costs If the owner is set on selling the home, it is possible to lessen the income tax by the amount of the selling cost. The cost can comprise of repairs, title insurance, advertising costs, and commissions for the real estate broker as well as inspection fees. IRS allows deduction of repair costs associated with selling costs if the repairs are done within ninety days prior to the sale and were made with the purpose of improving the market value of the home. Selling costs are deducted from the gain on the sale. This is gotten by subtracting the closing costs from the selling price and also the tax basis. Tax basis is achieved by taking the original purchase price and then adding the cost of all improvements then subtracting any depreciation (Lasser, 2013). Capital gains exclusion When a home is sold, it is possible to keep a part of the profit as tax free income. If the home was used as the main place of residence for two years a couple can file a claim of $500,000 jointly. If filing separately, one is entitled to keep up to half of the above mentioned amount of the profit tax free. Moving costs In case you are required to move by beginning a new job, you can deduct a part of your moving expenses from the income taxes. There are a few IRS requirements however necessary to allow you to make this claim. The new job must be more than fifty miles from the home than the previous job was. You are also required to work full time for not less than 39 weeks within the 12 months after moving. These deductions include transportation, lodging fees as well as storage facilities (Fishman, 2013). Mortgage tax credit The home buying program of mortgage credit certificate allows low income earning people who are first time buyers to enjoy a mortgage interest tax credit worth 20percent of the mortgage interest payment for a home. If the certificate credit rate is above 20%, the maximum credit is $ 2,000 annually. It is a requirement to first apply to the local government or state for an actual certificate. The credit is allowed each year the owner keeps the loan and resides in the house purchased with the certificate. The credit is subtracted directly from the amount of income tax owed (Fishman, 2015). As much as there are many tax breaks available, there are still other costs where tax deductions are not applicable. These include insurance, home owners’ association dues, additional principal payments among others. Reference list Fishman, S. (2013). Tax deductions for professionals. Berkeley, CA: Nolo. Lasser, J. K. (2013). J.k. lassers your income tax 2011: For preparing your 2010 tax return. Hoboken, N.J: Wiley. Fishman, S. (2015). Every landlords tax deduction guide. Brauner, Y., & Stewart, M. (2013). Tax, law and development. Cheltenham, UK: Edward Elgar. Dolan, R., Campbell, D. R., & Franklin, D. (2012). The U.S. real estate buying guide. Mississauga, Ont: John Wiley and Sons. Read More