Tax Guide for Homeowners
Your Home as a Tax Shelter
Owning a home gives you the following tax benefits (subject to certain limit on itemized deductions for higher-income taxpayers):
- A deduction for real estate taxes.
- A deduction for interest on your home mortgage (up to $1,000,000) or home-equity loan where available (up to $100,000).
- Deduction for losses that occur as a result of fire, storm, flood, earthquake or other casualty, to the extent the loss exceeds $100 and ten-percent of your adjusted gross income (after reductions for insurance reimbursements, if any).
- Deduction for qualifying expenses if you conduct a business in your home or rent out your residence and meet other requirements in the tax law.
- Tax-deferral on any gain in the sale of your home if you replace at an equal or greater value within two years.
- No tax on $125,000 of gain on a home that you sell after you have reached age 55 (certain qualifications are required).
Tax Tips for Homeowners
Tax Tip #1: Points paid on home mortgages may be deducted in the tax year you pay them. You don't have to write a separate check for the points as long as you provide funds for down payments, escrow deposits, etc., at least equal to the points paid. In addition, for homes purchased after December 31, 1990, the buyer can deduct points paid by the seller.
Tax Tip #2: Points paid on a refinanced mortgage do not qualify for current deduction; you deduct them pro rata over the life of the loan. There is an exception if part of the refinanced funds are spent on home improvements. You may be able to deduct the same percentage of points paid as the percentage of the loan that was used for improvements.
Tax Tip #3: If you refinance for a second time and, in doing so, pay off your first refinancing, the balance of points not yet deducted becomes deductible in the year of the second refinancing.
Tax Tip #4: A home-equity loan may enable you to finance purchases of consumer items and maintain deductibility of interest. Interest on consumer loans is no longer deductible, so this option for homeowners will become increasingly important. Beware that you do not borrow beyond $100,000, or you'll lose the interest deduction on the excess. Also realize that if you cannot make payments on the loan, you could lose your home.
Tax Tip #5: If you suffer a home casualty loss in a disaster that causes your area to be designated a federal disaster area, you have the option of taking the loss on your prior year's tax return. As such, you have funds that much sooner to help in repairing your home.
Not all home improvements will increase your home's resale value. Home improvements most likely to have their cost recovered at resale include such changes as adding a bath, adding a greenhouse, and remodeling the kitchen. Improvements you're less likely to recover the cost of are adding a swimming pool, a tennis court, or finishing the basement.
If your home is destroyed in a presidentially declared disaster, the general two-year replacement period is extended to four years. There is no tax on the receipt of insurance proceeds for unscheduled personal property.
Keep Track of Home Improvements
Keep accurate records of all home improvements. You can't deduct them, but when you sell your home, the cost of the improvements will increase your basis in the property and decrease any income taxes you may pay.
Grabau & Company, PC, is a certified public accounting firm located in Denver, CO, and established in 1990. The staff have over 25 years of experience.
Here's a list of expenditures which may increase the tax basis (cost) of your home.
- Installing storm or screen windows and doors
- Adding a room
- Finishing the attic or basement
- Installing air conditioning
- Adding a fireplace or fireplace heatilator
- Adding a swimming pool
- Putting in a sprinkler system
- Landscaping
- Installing a fence and gates
- Constructing a retaining wall
- Paving or blacktopping a driveway
- Putting in walkways or sidewalks
- Building a deck, terrace or patio
- Adding a garage or porch
- Buying additional acreage
- Building in furniture
- Adding a closet
- Installing a kitchen dishwasher
- Building a laundry chute
- Adding a shower door, towel racks and/or cabinets in the bathroom
- Installing a TV antenna and wiring
- Installing a fire or burglar alarm system
