As you prepare your 2014 taxes, here are some ways your home can help you reduce your tax liability, and if your aren’t a homeowner yet, consider these great reasons to consider adding homeownership to your list of goals for 2015.
Mortgage Interest
Did you know Americans save about $100 million in taxes annually from mortgage insurance deductions? In the U.S., homeowners can deduct the interest paid on mortgage balances up to $1 million and the interest paid on home equity loan or second mortgage balances up to $100,000. The greatest tax benefit is felt in the first few years of the loan, when the payments are comprised almost entirely of interest.
John Karadsheh
Private Mortgage Insurance
Homeowners who have less than 20 percent equity in their mortgage must typically pay for private mortgage insurance (PMI). PMI is deductible on personal residences and vacations homes, but not rentals. This deduction only is available if the head of household, married couple filing jointly, or single earner’s adjusted gross income is less than $109,000. This provision was set to expire in 2014, but was renewed in the last weeks of the year into 2015.
Mortgage Points
Did you buy a new home this year? When originating loans, lenders can charge borrowers points, or percentage-based fees in exchange for lower interest rates. Each point equals 1 percent of the entire amount of the loan. For example, on a $100,000 loan, 1 point would cost $1,000. If you paid points on a new home purchase, they are deductible in the year they were paid. Points paid on a home equity loan or to refinance also are deductible, but only over the life of the loan.
Real Estate Taxes
For most homeowners with mortgages, property taxes are collected as part of monthly mortgage payments, placed in an impound account, and then paid by the lender as they are due. Homeowners may deduct the amount of tax actually paid out by the lender to the municipalities. New homeowners can deduct the full amount of property taxes paid upfront at closing.
Energy Upgrades
If you made energy-efficient upgrades, you may be able to claim a percentage of the cost up to $500 in tax credits. These tax credits are cumulative, so if you claimed $400 worth of upgrades in 2013, you would only be able to claim $100 in 2014. Eligible upgrades include the upgrade of exterior windows, heating and cooling systems, insulation and exterior doors. Separate tax credits also are available on geothermal heat pumps, solar water heaters, solar panels, fuel cells and small wind-energy systems. Each item is deductible at a different level (and with restrictions). So, do your research.
Short Sales
If you decided to short-sell your home last year, you may benefit from the Mortgage Forgiveness Debt Relief Act. The act forgives up to $2 million worth of debt for qualifying individuals. Without the Mortgage Forgiveness Debt Relief Act, the IRS would see forgiven loans as taxable income by the IRS. Congress renewed this act in late December of this past year to cover short sales in 2014. Short-selling a home in 2015 is more of a gamble. If Congress doesn’t renew the act, those who do a short sale will have to pay taxes on the forgiven debt.
Exclusions on gains from sales
If you lived in your primary residence for two of the last five years, you are eligible for an exclusion on the net sales gain of your home up to $250,000 for an individual and $500,000 for a couple. The net sales gain is the selling price less the purchase price, plus any improvements and selling expenses.
Vacation/Second homes
Mortgage interest payments and property taxes are deductible on second homes. So, too, are other business expenses on rental properties. According to Certified Public Accountant Michael Schulman, “You can’t deduct your own homeowner’s insurance [on a primary residence], but you can deduct it on a rental property.” The same is true for costs for pool service, gardening or maintenance charges for a co-op.
To the extent that this article concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. This message was written to support the promotion or marketing of the transactions or matters addressed herein, and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
John Karadsheh is an Associate Broker with Coldwell Banker Trails and Paths. He has been a Multi-Million Dollar producing agent for more than 12 years and is an Accredited Buyers Representative (ABR) and Certified Residential Specialist (CRS). In 2014, John was voted the No. 1 Real Estate Agent in Arizona by Ranking Arizona. You can reach John at (602) 615-0843, or visit his website at www.ArizonaHomesandLifestyles.com.