The Top 10 Real Estate Tax Deductions for Homeowners
As the time to file income taxes approaches, we need to take a new look at the changing tax landscape for homeowners. The dynamic atmosphere in Washington, D.C. has a different effect each year on which tax breaks are proposed, rescinded, changed and extended for taxpayers who own a home.

Many of the tax benefits that homeowners enjoy, which were on the chopping block over the past few months, have been protected and extended through the 2013 tax season.

1. Mortgage Interest Deduction

The mortgage interest deduction has always been the most-beloved tax benefit of home buyers in the United States. New homeowners’ monthly mortgage payments are made up almost entirely by interest for the first few years. Their ability to deduct that interest can result in a healthy reduction in tax liability. Homeowners who itemize their deductions can deduct the interest paid on a mortgage with a balance of up to $1 million. Americans save around $100 million every year by deducting mortgage interest on their tax returns.

2. Home Improvement Loan Interest Deduction

The interest on home equity loans used for “capital improvements” to a home can also be a tax deduction. On loans with balances of up to $100,000, the interest is tax-deductible for a homeowner who uses the loan to make improvements to the home such as adding square footage, upgrading the components of the home, or repairing damage from a natural disaster.

3. Private Mortgage Insurance (PMI) Deduction

Homeowners who make a down payment of less than 20 percent are usually paying some sort of Private Mortgage Insurance. PMI can be a few dollars to hundreds of dollars per month, and it is a large portion of many homeowners’ mortgage payments. If your mortgage was originated after Jan 1, 2007, and you have PMI, it can be a tax deduction. The extension of this tax deduction in 2013 was one of many last-second saves by real estate industry advocates.

4. Mortgage Points/Origination Deduction

Homeowners who paid points on their home purchase or refinance can often deduct those points on their tax returns. Points, often called origination fees, are usually percentage-based fees which a lender charges to originate a loan. On a home purchase loan, taxpayers can deduct the entirety of the points that they paid in the same year.

5. Energy Efficiency Upgrades/Repairs Deduction

Homeowners can deduct the cost of the building materials used for energy efficiency upgrades to their home. This is actually a tax credit, one which is applied as a direct reduction of how much tax you owe, not just a reduction in your taxable income.

Insulation, doors, new roofs, and many other items qualify for the energy efficiency credit.

6. Profit on Sale of Real Estate Deduction

If you’ve sold a home in the past year, you’re likely aware that individuals can claim up to $250,000 of profit from the sale tax-free and married couples can claim up to $500,000 tax-free. Of course, there are some requirements to escaping the capital gains tax on this profit. The home must be a primary residence. This means that you must have lived in the home, as your primary residence, for two of the past five years.

7. Real Estate Selling Cost Deduction

For those lucky folks whose profits on the sale of their home might exceed the $250k/$500k limits, there are still some ways to reduce the tax burden. The costs of selling the home can be significant, and those in themselves can be claimed as tax deductions. By adding up all of the fees paid at closing, capital improvements made to the home while you owned it, money spent to make repairs to damaged property, and marketing costs necessary to sell the home, you can add a significant figure to the cost basis of your home. Your cost basis begins with the original price of the home, and then adds in the improvement and selling costs. When the new cost basis price is compared to your selling price, it reduces your potentially-taxable profit on the home significantly.

8. Home Office Deduction

Homeowners deduct a percentage of their mortgage, utilities and repair bills in direct proportion to the amount of their home that is dedicated office space. There are a few hard and fast rules to live by when deducting the costs of your home office. The home office must be your principal place of business. It needs to be exclusively used for business. You need to be realistic with its size and use.

9. Property Tax Deduction

New homeowners often don’t know that their property taxes are deductible. While it may sound strange to have a tax-deductible tax, the overall effect is that you don’t pay income tax on money that was spent on property taxes. Homeowners should be careful to only deduct the amount of property tax actually paid to their local municipality for the year.

10. Loan Forgiveness Deduction

The Mortgage Debt Forgiveness Relief Act of 2007 was created when short sales were becoming a new and growing part of the real estate market. An underwater homeowner might convince their lender to agree to a short sale of their home at $100,000, even though they owe $150,000 on their mortgage. While the lender forgives the extra $50,000 owed after the short sale, the government views it as $50,000 in taxable income (a gift from the lender to the borrower).

The Debt Forgiveness Act temporarily relieved the taxpayer of that burden, but was set to expire this year. Through much effort, it was extended along with many other homeowner tax relief measures this year and homeowners can continue to claim this tax relief in 2013.

IRS-suggested disclaimer: To the extent that this message or any attachment 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.

View this original article on realtor.com’s blog. Posted by Breckenridge Associates Real Estate on
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