Owning a home pays off! Prepare for tax season by taking advantage of these tax deductions for homeowners.
Mortgage Interest Deduction
The interest you pay on a mortgage of up to $1 million is deductible on Schedule A when you use the loan to buy, build, or improve your home. If you take on a second mortgage to improve your home or to buy or build a second home, that counts towards the $1 million limit.
If you use loans secured by your home for other things, you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately).
Property Tax Deduction
Don’t forget to deduct the real estate property taxes you pay on Schedule A!
If you bought a house this year, check your ALTA statement to see if you paid property taxes when you closed on the purchase of your house. Those taxes are deductible too!
Prepaid Interest Deduction
Prepaid interest that was paid when you took out your mortgage is typically 100% deductible in the year you paid it.
If you refinance your mortgage and use that money to improve your home, any points you pay are also deductible in the same year.
If you choose to refinance or use the money for something other than home improvements, you’ll need to deduct the points over the span of your mortgage. For instance: if you refinance into a 10-year mortgage and pay $4,000 in points, you can deduct $400 per year for 10 years.
Your lender should send you a Form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the ALTA / settlement sheet you received when you closed on the purchase of your home or when you refinanced.
PMI and FHA Mortgage Insurance Premiums
If you have a mortgage but didn’t put down a sizable down payment, the lender requires the mortgage be insured. The premium on that insurance can be deducted as long as your income is less than $100,000 and only if your loan was taken out in 2007 or later.
If your adjusted gross income is more than $100,000, your deduction will be reduced by 10% for each additional $1,000 that your adjusted gross income exceeds $100,000. This means that if you make $110,000 or more, you won’t be able to clam this deduction.
Loans from the FHA, VA, and Rural Housing Service also include premiums, but are much more difficult to work into your tax forms. It’s definitely worth it to consult with a tax adviser to help you calculate these deductions!
Vacation Home Tax Deductions
Deductions for vacation homes can get tricky, so do yourself a favor and keep detailed, thorough records about how and when you use your vacation home.
If you’re the only one using your vacation home (you don’t rent it out for more than two weeks a year), you can deduct mortgage interest and real estate taxes on Schedule A.
If you rent your vacation home out for more than two weeks and use it yourself for two weeks or less, it’s treated like a rental property and your expenses are deducted on Schedule E.
If you rent your home out for part of the year and use it yourself for more than two weeks, you have to keep track of income, expenses, and allocate them based on how often you used and how often you rented the house.
It pays to go green! The Nonbusiness Energy Tax Credit offers tax credit for energy-efficient home systems when you file using the IRS Form 5695. These credits will offset what you owe the IRS up to 10% of the amount you spent on certain upgrades.
The credit carries a lifetime cap of $500, so if you’ve used it before, you’ll have to subtract prior credits from the limit. Luckily there’s no cap on what you’ll save on your monthly utility bills by making energy-efficiency upgrades!
Some upgrades that qualify for the credit include:
- Heating, ventilation, and air conditioning
- Metal & Asphalt Roofs
- Non-Solar Water heaters
- Windows, doors, and skylights