Deciding to purchase a home is a major life decision.
Homeownership comes with a great deal of financial responsibility, and although you may have to spend a significant amount of money maintaining it, there are several ways that you can get money back through the filing of taxes. This is a summary of what is available, but it is always necessary to speak with a tax professional to ensure that you are doing the right thing.
Mortgage interest is the interest that you pay on the mortgage for your primary residence. Most owners are able to claim up to $1 million in interest as an itemized deduction on their taxes, and doing so can result in a sizeable refund. Mortgages associated with building a home or making home improvements may also be legitimate deductions under this category. In addition to mortgage interest, up to $100,000 of the interest paid on home equity loans is also eligible to be included as an itemized deduction.
When a person takes out a mortgage to purchase a home, the lender usually deducts certain costs that are referred to as points. One point equals 1% of the total amount of the mortgage. If you are making itemized deductions, and it is within one year of purchasing your home, you may be able to include points in those deductions.
It is important to point out that all closing costs cannot be claimed as deductions. Once again, consulting with a tax professional is necessary to determine what is allowed. Closing costs are fees associated with taking out a mortgage. They can include the costs for processing the sale, drafting the contract and recording the sale. Costs to have the property appraised and also to check the title are usually included as well.
Real Estate Property Taxes
Another itemized deduction that homeowners can make are the state and local property taxes they pay on their residence, provided that the property is their principle residence. Only the property taxes paid in the same tax year are eligible for this deduction.
Energy Tax Credit
If you have made energy-efficient improvements to your home, you may be able to receive the Energy Tax Credit. Eligible updates include roof, windows, skylights, exterior doors, and insulation materials. Please note, however, that there is a $500 lifetime cap on this credit. This means that if you’ve claimed it in previous years, you can only receive the difference between the $500 and what you’ve already received.
If a homeowner contributed less than 20% of the purchase price as a down payment, then they must get mortgage insurance. While this may seem like an unwanted additional expense, the monthly premium payments can be included as an itemized deduction.
Capital Gains Exclusion
In the event that you decide to sell your home, you may not have to pay the capital gains tax on the money you make from the sale. If you are a single person and have owned and occupied your home for two of the last five years, you will not have to pay taxes on the first $250,000 of profit. For married couples, they are not obligated to pay taxes on the first $500,000.