When you own a home you are able to deduct a lot of home related expenses if you itemize your deductions. That means that you will have to file Form 1040 including schedule A. Below is a look at some of the taxes advantages when you own a home.
All of the mortgage interest you pay each month is tax deductible unless you have a loan over $1 million dollars. That is great news since most of the money you pay goes toward interest.
Even if you refinance your home, get a line of credit or get a home equity loan, the interest is generally fully tax deductible on equity debts that are $100,000 or under.
Even second homes are fully tax deductible. It can be a home, RV or boat as long as it has facilities for sleeping, cooking and a bathroom. You can even rent your second home as long as you stay in your home 14 days a year or more than 10% the amount of days you rent the property (whichever is more). If you do not stay in your home that long, the IRS will consider it a rental property and you will lose your mortgage interest deduction.
If you paid points on your mortgage so you could get a better rate, you can get a tax break. When you purchase your main residence, the IRS will let you deduct all of the points during the year they were paid.
When you refinance your home, you still get a tax break but the points usually get deducted over the loan’s life.
For lines of credit or home equity loans, you can deduct the points the same year they are paid if the money is used to do work on the home. If you use the money to do anything else, the points will be deducted throughout the term of the loan.
On second homes and vacation residence, the money paid in points must be amortized over the term of the loan.
Another big tax break you will receive is deducting the amount you paid for property taxes during the year. All of your property taxes that were paid will be itemized as an expense on IRS Schedule A.
Sell Your Home
If you sell your home, you can avoid some of the taxes on any profit you make. A sales gain up to $250,000 for individuals and $500,000 for married couples is tax free if the property was owned for 2 years and has lived in it 2 years before the sale. If you do not meet the residency and ownership requirements, you will owe tax on all of the profit.
If you sell your home because of unforeseen circumstances, the IRS provides some tax relief for people who have to sell before they fully qualify for the tax break.
Unforeseen circumstances include:
– Job loss
– Multiple births during the same pregnancy
– Employment changes that make it hard for the owner to pay mortgage and cover all basic living expenses.
Also, you can receive a partial exclusion if you have to sell because of damage to the residence from a man-make disaster, if the property is converted involuntarily, taken by the government or natural disaster. Check with your tax professional for more information.
Under the Mortgage Debt Relief Act, homeowners that were either foreclosed, had their debt reduced in a restructuring of their mortgage or had a short sale do not have to pay taxes on the canceled debt as taxable interest. This tax law is only in effect until the end of 2013 unless Congress takes action.