If you own a home, Uncle Sam has some nice tax breaks for you.
The more than 86 million Americans who own their homes may find several different ways to lower their tax bill this year using tax credits and deductions for home improvements, mortgage costs, home moving and other home-related expenses.
Here are 10 tax breaks to look into this year if you’re a homeowner.
1. Environmentally-friendly home improvements.
There are two tax credits for the installation of energy-saving equipment in a home. The first, the Residential Energy Efficiency Property Credit, is available to homeowners who invest in qualified hot water heaters, geothermal heat pumps, fuel cells and wind turbines. Homeowners can claim 30 percent of the total cost, including installation. There is no upper limit for solar, wind and geothermal equipment, but the maximum for fuels cells is $500 for each half-kilowatt of power capacity.
The Nonbusiness Energy Property Credit is the second credit available to green homeowners who use equipment or materials with certain efficiency standards such as insulation, exterior doors, windows or skylights and roofing. It also includes central air conditioning systems, water heaters and pumps and furnaces. The credit, subject to limits, is worth 10 percent of the total cost and 100 percent of residential energy property costs.
2. Home sale.
You can exclude up to $250,000 of any capital gains ($500,000 if married filing jointly) on the sale of your home if you meet certain requirements. Among them, the home must have been used as your main home for at least two of the last five years before the sale. Also, you cannot have bought the home in a like-kind exchange, or 1031 exchange, in the last five years.
3. Regular home improvements.
Home improvements, both big and small, can help you tax-wise when you sell your house. These improvements increase the total amount of money you invested in your home and add to the tax basis in the house. The tax basis amount is subtracted from the sales price to determine the amount of your profit. A bigger tax basis reduces any gain that results from selling your house. Homeowners are exempt from paying taxes on gains from a home sale up to $250,000 ($500,000 if married filing jointly). Above that, they have to pay taxes. One caveat: The cost of needed repairs or maintenance is not considered an improvement by the IRS.
4. Home sale costs.
Selling expenses, such as sales commissions and legal fees, reduce how much you received from selling your home, which either reduces the taxable capital gains or makes them non-existent. Again, homeowners are except from paying taxes on gains from a home sale up to $250,000 ($500,000 if married filing jointly).
5. Mortgage points.
You can deduct all the mortgage points in the year you pay them if you meet a handful of requirements. The home that secures the mortgage must be your main home, and the home loan was used to buy or build it. Paying points should be an established business practice in your area and the amount you paid should not exceed the area’s norm. You can’t have used borrowed funds from either a lender or mortgage broker to pay for the points. The amount must be shown clearly as points on your settlement statement.
6. Refinancing points.
Similarly, refinancing points can be deducted over the life of the new mortgage. However, if you use some of the proceeds from refinancing to improve your main home, you can deduct part of the points related to the improvement in the year you paid them. The remaining amount can be deducted over the life of the loan.
7. State and local real estate tax.
Any state or local real estate taxes on a home you own is deductible on your federal taxes. The taxes must have been paid in the tax year, including any prepaid taxes for the following year. Real estate taxes you pay on foreign property and school taxes based on your property’s value are also deductible. In 2013, nearly 37.8 million tax returns used this deduction, with an average value of $4,610, according to the Tax Institute at H&R Block. However, local improvements, charges for trash collection or library taxes, or those that aren’t based on the property’s value are not tax deductible.
8. Mortgage interest deduction.
The IRS allows you to deduct any interest paid on a loan secured by a primary or second home, including a mortgage, second mortgage, line of credit or home equity loan. The deduction typically is limited to home loans that total $1 million or less. You can generally deduct interest on home equity debt up to $100,000. In 2013, 33.3 million tax returns used this deduction, for an average of $8,900 per deduction.
9. Mortgage premium insurance deduction.
Created by the Tax Relief and Health Care Act of 2006 and extended to this year, this deduction allows homeowners to subtract their annual payments for private mortgage insurance. Homeowners must pay for this insurance if they contribute a down payment that is less than 20 percent of the sales price. The insurance protects the lender from default on the mortgage. Last year, this deduction was taken on 4 million tax returns worth a total of $5.83 billion (or $1,465 per return), according to the Tax Institute.
10. Mortgage debt relief.
Since 2007, thanks to the Mortgage Debt Relief Act, homeowners who had their home loan restructured or mortgage debt forgiven due to a foreclosure or short sale are exempt from taxation up to $2 million. Before the act, homeowners were taxed on any amount of debt that had been canceled or forgiven. This deduction was taken on 336,501 tax returns last year, totaling $29.42 billion (or $87,422 per return), according to the Tax Institute.