How to Get Tax Breaks on Your Home
Purchasing a home is a major milestone for many people, and the benefits that come from owning a home during tax season are even better. From deducting interest paid on mortgage loans to taking advantage of government energy credits, here are all the ways you can earn tax breaks from your home.
Interest on Mortgage
One of the biggest tax breaks for home owners is the interest paid on the mortgage. You can deduct up to $1 million worth of interest you paid throughout the year. To get these incredible savings, make sure you include all the interest you paid from the date you closed the home to the end of the year. The interest you paid in the first month may not be included in your 1098 form from the lender, but it will be in the settlement sheet.
You may have paid lender points in order to get the mortgage. These points are typically a percentage of the overall loan and can be deducted from your taxes. The only hitch is that the points must match your down payment on the loan. If you paid six thousand dollars in points, for example, and put down the same amount on the loan, then you can deduct it.
You should save all the receipts for home improvements, including landscaping, fence work, energy-efficient HVAC systems, storm windows, and extra additions. You can’t deduct these expenses every year, but they will factor in later if you sell the home. These improvements will be added to the price of the home to help figure out the cost basis.
For those unlucky enough to put down less than 20 percent during the purchase, you likely dished out premiums for insurance on the loan. These payments help protect the lender in case of default. If the mortgage was placed after 2007 then you can deduct these premiums. If your mortgage was before 2007 then you will not be able to deduct insurance premiums from your taxes.
Taxes From Real Estate
Any local taxes paid on the home can be deducted on taxes. You should receive this amount from your lender, especially if the money is coming out of an escrow account. You unfortunately cannot deduct money paid into the escrow account unless it is paid towards taxes. If you paid directly to the government, then you will need to consult your own records for the balance. For newly purchased homes, the real estate tax will show up on the settlement paperwork.
The government provides credits for energy efficient home improvements. This credit is up to $500 and is a dollar-for-dollar break. You can also gain a ten percent credit for most energy-efficient improvements, including doors, windows, skylights, roofs, air conditioners, water heaters, boilers, heat pumps, and furnaces. A thirty percent credit is available for high-end energy efficient items, such as solar panels and water heaters.
One great part of owning a home is that most of the profit you make from selling the home is tax-free — as long as certain criteria is met. For single home owners, you need to have lived in the home for at least two years. If so, then you can earn up to $250,000 without paying taxes. The same holds true for married couples, though the maximum is pushed to $500,000 in profits. This means that for the majority of the cases, you will not have to pay taxes on the profits earned from selling the home.
Home equity loans are great for a little extra cash during hard times. If you take out a home equity loan, then you can deduct the interest paid on the loan as long as it doesn’t exceed $100,000. Even better, it doesn’t matter how you spent the money. The IRS considers it money paid towards the mortgage interest.