10 Tax Tips for Homeowners
By Kate Kershner, HowStuffWorks.com
The joys of homeownership are manifold. You can nail whatever you want to the wall! You can paint a room neon green! You can be personally responsible for house liability issues and emotionally responsible for how sad you get in the summer when all the neighbors around you mow their lawns while you had no intention of getting out there for another week.
Some parts of homeownership are more fun than others.
But don't assume that trying to navigate tax code as a homeowner is a nightmare. There are a lot of great perks for people who own homes, and we're here to help you find them. From your mortgage to your home insurance -- not to mention the intricacies of selling and buying -- let's dive into some simple tips that can help elucidate a few points come tax time.
10: Mortgage Interest
When it comes to taxes, the eternal question is whether or not to itemize. There's no way around the fact that taking the standard deduction is a heck of a lot easier: The government gives you a nice chunk of relief without any tallying of costs or poring over tax code.
But if you're a homeowner, you might think twice about going the easy way out. Mortgage interest is entirely deductible, and -- depending on your mortgage agreement -- it might make a heftier tax credit than the standard deduction. Since a lot of monthly mortgage checks are going toward the interest of the loan as opposed to the loan itself, this can create a sizable savings. (Keep in mind that the 2014 standard deduction is $6,200 for single people and $12,400 if filing jointly.)
However, remember that you can only begin writing off expenses after you reach 2 percent of your adjusted gross income (AGI). So if your AGI is $60,000, the first $1,200 worth of itemized expenses don't even count.
9: Property Taxes Are Deductible
In a move that frankly makes no sense, the IRS lets you deduct taxes on your tax return! Seriously.
On your federal tax return, you can claim any state and local property taxes you pay. While you might not realize you're forking them over, you're actually paying state and local property taxes with every mortgage payment. They go into escrow, where the mortgage lender pays them once a year. On your yearly summary, you can look up the cost of property taxes for your listing. Even if you just bought the house, it should list what taxes you paid versus what the old owners paid for the year -- but be sure that you deduct only your amount, of course.
Remember, however, that this only applies to those itemizing their deductions. Take the standard deduction, and you're outta luck.
8: Casualty Losses
If something dramatic happened this year to damage your home or property, the IRS will let you account for the loss. You can only write off casualty losses if you itemize your taxes though: They're not above-the-line deductions. Casualty is a pretty broad category, and the IRS says the loss must be caused by a "sudden, unexpected or unusual" event [source: IRS].
As a homeowner, that could range from damage caused by a natural disaster to vandalism. Keep in mind that you can only write off the fair market value of the property; the $1,200 flat-screen TV you bought in 2008 might only be worth $800 now, for instance. The IRS also requires you to subtract some rates from your actual loss ($100 per event, then 10 percent of your AGI) to arrive at your deduction.
Also, don't think that you can receive tax deductions if insurance or a lawsuit covers your losses. You can only claim deductions on unrecoverable losses.
7: Watch Out for Debt Cancellation
While it would be nice if we could offer nothing but good news and credits for homeowners, we should also offer some fair warnings for those who aren't in great real estate shape.
If you are planning a short sale on an underwater property, be aware that any cancellation of debt is considered income. That can be terribly burdensome. Consider, for instance, what might happen if you owe $250,000 to your mortgage lender and short-sell your home for $150,000. That leaves you with a whopping $100,000 you have to report as income -- and that means you're going to have to pay taxes on it.
Foreclosures work a little differently; if you're personally responsible for the entire mortgage, you'll also be responsible for the cancellation of the debt. Congress has yet to renew the Mortgage Forgiveness Debt Relief Act, which expired in 2013 and allowed some qualified taxpayers to exclude debt from their taxes.
6: Sell Sell Sell
Keep in mind that it's not just owning a home that can help you out come tax time: Selling your house also has some advantages. Not that it's necessarily a terrific idea to sell your home just to collect some tax savings, but you might as well take advantage of them when you can.
Did you advertise your sale in any way? You can write it off. Did you buy title insurance? Write it off. You can even claim some repairs if they were performed during a certain time period around the sale [source: Reeves]. Perhaps even more impressive? If you make under $250,000 ($500,000 for married couples) in profit from the sale, it's not taxable. Keep in mind that you will have to live in the house for at least two out of five years of ownership to qualify. (For those keeping track, that means you have to own it for at least two years.)
If you are itemizing to take advantage of your mortgage interest and other homeowner deductions, don't think you can get away with simply racking your brain to try to come up with as many as you can. It's really important that you keep track of your actual expenses -- and that means receipts, bills and any other paper work that the IRS might want to lay eyes on during an audit.
If you're itemizing, you should have an organized system for tracking your finances. Consider investing in a scanner so that you have both a digital image and hard copy of your receipts. Having a backup copy is convenient enough, but it's even better to use a software system (or even a digital filing system of your own devising) to track and store your deductions. It'll save you a lot of time when tax season rolls around.
4: Moving Expenses
For most people, being a proud homeowner also means that you are at times a home seller and buyer as well. And while we already discussed some nice tax write-offs you can take if you're selling your home, you shouldn't consider the cost of moving to a new house a total loss. If you're relocating for a new job, you can write off quite a bit of your travel expenses for the trip.
Now, let's be clear: You can only deduct moving expenses if it's for a new job, and you have to meet some specific requirements. (In short, your new job has to be a certain distance from your old and new house, and you also have to work full-time for at least 39 weeks during the year after you move.) If you do meet the requirements, you can take a whole host of deductions: the cost of traveling to the new location, the cost of a storage unit (for up to 30 days), even the cost of lodging along the way. Even better, the deduction doesn't just apply to the new employee; it applies to all members of your household. And having Rover around will finally prove useful -- you can even deduct the cost of moving the family pets.
3: Buy a Second Home
It may seem positively crazy to save taxes by buying a whole new home. And don't be mistaken; for most, it's not a reasonable way to "save" money. But here's the thing: All the tax breaks that we've talked about that apply to your first home? They apply to a second one too. That means you get to write off mortgage interest (up to $1.1 million), property taxes and all the rest. The only catch is that you can only do that if you're not renting out the home.
If you're renting it out only a few days a year? You're in real luck. You can pocket any rental income -- tax-free -- if it's rented out less than 14 days a year, along with the other deductions. If you rent it out for more than 14 days, you're going to have to report all your rental income. But if you're still using it at the time for personal use, you can use write-off deductions based on the percentage you spend personally using it. So, if you rent out the house a couple months a year, use it a month a year and keep it empty for the remainder, you can't include the cost of the rental time in your allocations. Everything else? Fair game.
2: Home Office
The home office deduction tempts every homeowner who files taxes. It seems easy enough: Just claim the den as a home office, write off those Internet bills and the cost of that new office chair and relax knowing that your home is finally working for you. But of course, you won't do that, because taking the home office deduction is a red flag for audits, you don't apply and the deduction is absurdly hard to figure out. Time to go to the den and brood.
Not so fast. The IRS has actually made it much easier to claim a home office deduction, and there's no reason to believe that taking it triggers an audit. You do have to make certain you fit the criteria, but many homeowners who run a small business or have a dedicated office space in their home should take advantage of it. The biggest rule is that you need to use your home office space exclusively and regularly for business. (That means you can't claim the family room where everybody hangs out, and you can't claim an empty room because you've taken a few business calls there.)
If you do meet the conditions of exclusive and regular use, the IRS offers a new, simplified method of deduction. Instead of trying to figure out the percentage of utilities and other expenses you use for business, you can simply multiply the square footage of your business space (up to 300 feet [91 meters]) by $5 to reach a dollar deduction amount.
1: RV or Boat Loans Count as Mortgage
This tip is number one not because it's necessarily the most useful, but because it's absolutely amazing. As we said very early on, deducting your mortgage interest might be the best way to get a nice big itemized deduction. For most of us, that means pretty much one thing: We can take that one mortgage loan and make it work tax magic.
But here's the thing: If you've gotten a loan for a recreation vehicle or boat that includes sanitation, cooking and sleeping facilities, you can write off the mortgage interest on that loan too. In other words: If you can live on your RV or boat, you can count it as a second home and take the deduction accordingly.
Here's the bad news, if you're just a rich person with houses, boats and RVs to spare: You can't write them off if you qualify for the alternative minimum tax, which is for those with higher incomes.