Real Estate Tax Deductions

April 15 is just around the corner and one of the biggest tax deductions available to homeowners is the real estate tax deduction. Find out the various ways you can apply real estate tax deductions to your tax return and get back some of your hard earned money.

Mortgage Interest

Under current U.S. law, all interest that is paid on a mortgage or mortgages of less than one million dollars is tax- deductible. This is particularly important in the early years of the loan when interest is front-loaded. For example, if the monthly payment is $900, and $800 of this is interest, the annual interest paid would be $9600. This interest is taken off a person’s gross yearly income, and is calculated in lieu of using the standard deduction. As the mortgage matures, however, and interest decreases in percentage, the deduction will also decrease.

This deduction is also applicable to a second mortgage and mortgages on other than one’s primary residence. Home equity loans also qualify as long as the money is used to make capital improvements on the property. Capital improvements are considered to be those that add to the home’s value, and might include such projects as adding a porch, garage or room, putting up a fence, installing a new roof, replacing windows and doors, updating heating or cooling systems, adding a pool or hot tub, installing insulation, or revamping the home’s exterior.

Married couples filing single may split the interest deduction, but together, that amount cannot exceed one million dollars.

Points

Buying a home involves a number of different fees and other expenses. One of these, called points, represents a small percentage (usually one percent) of the loan and is paid up front at the closing. Normally, no more than three points are charged on a typical mortgage loan. Points are fully deductible at tax time. Points charged on refinancing loans are also deductible.

Property Taxes

Whether your local property taxes are held in escrow for payment or you actually pay them personally, you can deduct this amount annually from your gross income. If your taxes are paid from an escrow account, you can find the amount of the taxes that were paid on the annual statement provided by the bank at tax time. If you are paying your own taxes, keep the receipts in a file with other important papers so that you can access them easily at tax time.

Moving Costs

If you have purchased a new home and are moving due to job relocation, you can deduct some, if not all of your moving expenses, including storage of your possessions, travel expenses, hotel costs, moving services, and other incidentals. There are certain requirements, however. The new job has to be fifty miles further from your home than the old job. For example, if your old job was five miles away from your home, the new job would have to be 55 miles or more from your old home. To qualify, the move must take place within a year of starting the new job. There are additional restrictions involved the length of time you stay on the job.

Real Estate Transaction Expenses

If you are selling your existing home, there are a number of additional deductions, considered selling costs, that you can deduct. All real estate commissions are deductible, as are legal fees, costs to advertise, inspection fees, title insurances, and other costs. You can also deduct expenses incurred for improving the home in preparation for the sale. These expenses are referred to as capital expenses, and include painting costs, repairs, gardening, and other home maintenance expenses. These expenses must be incurred within ninety days of the sale of the home.

In order to reduce capital gains taxes due on the sale of the old home, you can deduct all home improvement expenses incurred while you were living in the house. This would include maintenance costs as well as capital expenses. Capital gain is considered to be the amount of the sale once all real estate expenses and home improvement expenses are deducted. You are taxed on the amount of the sale unless all of the proceeds are used to purchase a new home.

The federal government allows married taxpayers to keep up to $500,000 as profit on homes that they lived in for at least two of the five years preceding the sale. Single taxpayers get half of this amount.

Your home can be both your “castle,” and a means by which to reduce your yearly tax burden. If you are buying a home, keep all your records accessible, and consult with a tax accountant to ensure the maximum deduction. Once you are in possession of your home, set up a file in which to keep receipts detailing home improvements made over the years that you live in the home. This will make it easier to pull together a list of expenditures when it comes time to sell your home.