The tax season is looming once again, but as a homeowner you have more to look forward to than to fear. The benefits of and the incentives for owning a home versus renting or leasing are the variety of tax deductions available to you as a homeowner.
So as you prepare to do your taxes, keep in mind the avenues and benefits available to you, and be sure to consult your CPA or tax adviser — and if you don’t have one, it is well worth the cost to consult with a knowledgeable financial professional.
It’s important to consider each home tax deduction and credit you are entitled to, as well as to avoid common tax-filing errors. So let’s look at some of the benefits that are available to you.
Property tax: First, be sure to deduct the property tax expense on your return for the year you paid it. Keep in mind that it could be different than the year it was due.
Energy upgrades: Another item to think about is whether you spent money on certain home energy-efficiency upgrades. If you did, there is a tax credit that will work in your favor (not to mention the savings you’ll enjoy on your utility bill after you’ve installed the energy upgrades). Energy upgrades are also a great way to improve the value of your home when you are ready to sell. From energy efficient windows and doors to kitchen appliances, solar panels and the like, upgrading your home is both good for the environment, a potential money-saver in your utility bill and an attractive incentive for potential buyers.
Home repairs: If home repairs were conducted, it’s worth noting that you can only claim deductions if part of your home is used for business or casualty losses. Be sure to discuss these types of deductions with a tax adviser so that you stay within IRS-approved guidelines for home office use.
PMI: Also, if you purchased your home with a down payment of less than 20 percent and purchased Private Mortgage Insurance, then 2013 was the last year you will be able to claim the PMI deduction since Congress has allowed it to expire. Just keep in mind there are income limitations, so check with your tax person about whether you qualify for this deduction.
Capital gains: Did you sell your home last year? If you made a profit, don’t forget that may you have to pay capital gains taxes on any profit. However, you can exclude $250,000 (or $500,000 if you’re a married couple) from your taxes, another incentive for homeownership, and for perhaps downsizing and selling your property, and keeping the equity in your pocket. Did you know that you can buy and sell your primary residence every two years and take advantage of this great tax benefit?
MID: And of course there is the mortgage interest tax deduction. Make sure you don’t claim too much for this deduction. You are allowed to deduct home acquisition debt up to $1 million, as well as $100,000 in home equity debt.
Home office: If your home is your primary place of business, then you could be eligible to deduct some of your home expenses, such as utilities and maintenance. Be careful here, however, because the IRS has strict guidelines, and it is important to document use, clearly allotted space separate from your living environment, and expenses.
Casualty losses: While we don’t have as severe weather conditions as might be found throughout the country, such as major snowstorms or rainfalls, we do have our own particular problems: hillside movement, fires, flooding and inadequate infrastructure when we do get the occasional big rainfall. If disaster created property damage and destruction to your home, then you are able to deduct some losses (but be sure to carefully document your deductions with photos, receipts and insurance claim reports). You should consult a tax adviser because filing for casualty losses can be complex, especially since your income and property value can impact the deduction, as well as depreciated values of items.
Remember, there are so many benefits to homeownership, and tax considerations are just a part of it. Call me soon and we can get you on the road to homeownership, or help you downsize and take your property tax basis benefit with you. Feel free to contact me with any questions you might have about other benefits that you can take advantage of and or the value of your home, especially if you are considering selling in this fantastic market.
— Mary Layman is a Realtor with Berkshire Hathaway HomeServices California Properties. She can be reached at mary@marylayman.com or 805.448.3890. The opinions expressed are her own.