Blogger Bill Gassett lists and discusses Tax Deductions for Home Buyers - all good reminders to ask questions your CPA.
Home Buying Tax Deductions
Do you want to find out what expenses you can deduct as a new homeowner? No one likes paying taxes, so making the most out of tax deductions when buying a home can be appealing. Though there used to be better deductions available in the past, it could still be worth your while. You will have to file your tax return with itemized tax deductions to claim.
There are many home buying tax deductions that could potentially reduce your tax bill by thousands. The IRS standard deductions are more substantial now than they used to be, meaning that it may not be worth the trouble of itemizing your expenses. Standard deductions for 2020 are $24,800 for married couples and $12,400 for single people. The head of the household deductions is $18,650 for unmarried parents.
If your real estate deductions are more than the standard amount allowed, it is worth your while to itemize. If not, stick with the standard tax deductions. Let's look at the deductions available to home buyers.
In order to qualify to get moving expenses deducted on your federal income tax return, you must meet three IRS requirements as follows:
- The moving expense must be closely tied to the start of new employment. Also, you are only able to deduct the costs you accumulated within a year of when you started your new job. If you don't move closer to work within the first twelve months of the new job, you'll lose the ability to deduct the moving expenses.
- In order to qualify, the new job would have to add at a minimum fifty miles to your commute if you stayed in your previous home. For example, if your last employment required you to commute ten miles from your former job, your commute to your new work would need to be at least sixty miles from your previous home.
- After the move, you have to work full-time at your new job for a minimum of thirty-nine weeks in the first year of employment. If you are considered self-employed, you will need to work full-time for at least seventy-eight weeks during the first two years of your new job.
So what can you deduct? Some of the allowable moving expenses could possibly include the following:
- Packing and shipping your belongings as well as associated expenses such as getting moving boxes or other items necessary to relocate.
- Temporary housing during your moves, such as a hotel or motel.
- Transportation during moving or renting a moving truck.
Make sure that you can document any of the deductions you plan on taking. The Internal Revenue Service suggests that you keep bills, receipts, credit card statements, canceled checks, and any mileage logs. Make sure you stash these records away somewhere safe in case an audit happens, or the IRS has any questions.
When paying back your mortgage, some of the monthly payment is for the interest on the loan. You can take this interest payment as a tax deduction. The amount you can claim depends on when you started the mortgage.
If you took out the mortgage before October 14, 1987, you might be able to deduct all of the interest paid. If the loan began between October 14, 1987, and December 15, 2017, you can claim deductions up to the value of $1 million. For mortgages, which started on December 16, 2017, or later, deductions of $750,000 can be made. Married couples that are filing separately will only be allowed to claim half the amount, however.
If you are paying mortgage insurance, you can claim a deduction. This tax deduction should have expired in 2017 but was extended to the end of 2020. Whether you are paying private mortgage insurance, guarantee fees for USDA loans, insurance for FHA loans, or funding fees for a VA mortgage, you can claim.
As long as the agreement began after 2006, and you have a gross income of less than $109,000 or $54,500 for separate filings for married couples, you can claim. The possible deductions may be reduced if you earn over $100,000, or $50,000 for separate filings.
Home Equity Loans
It used to be the case that you could claim interest paid on equity loans regardless of what the money was used for. Now you can only make interest deductions on money used to improve your home.
An equity loan will be added to the total mortgage when claiming interest deductions. If you have reached the maximum deductible amount with your first mortgage, you won't be able to claim more for an equity loan.
If you purchased discount points to reduce your interest rate, you can add this to your deduction. This can only be done if you haven't already maxed out your deductions for the interest paid. For those who are not familiar with the term "points," it is equal to one percent of your loan amount or a thousand dollars for every hundred thousand you borrow.
For example, you borrow $300,000; one point would equal three thousand dollars. If you plan on being in the home for an extended period of time, it makes sense to pay points as you'll be bringing down your interest rate.
If you move around a lot and know you won't stay in the house long paying points would not be wise. Consult with your lender so they can show the differences in payments between both choices.
If you paid points in the past year, they are a home tax deduction you will want to remember.
Property taxes offer a limited chance to increase deductions. You can claim up to $10,000 or $5,000 for married couples filing separately. This can be claimed as a combination of local and state, property, sales, and income taxes. Property taxes used to be a far more significant deduction, but that had changed over the last few years when the tax code was modified.
Working from Home
The self-employed, who use part of their home as an office, can use these expenses as a deduction. The IRS gives more information about what qualifies and how to calculate the deductions on their website. US News has an excellent resource on what you need to know about home office deductions.
If you need to install equipment in your home, which is required in order to help the accessibility necessary due to medical problems, this can be added to deductions. If the improvement is permanent and increases the value of the property, the deductible amount is reduced by the increased amount. Medical equipment that is needed for you or your spouse or a dependent can be included in this.
Expenses That Can't be Claimed
While there are some costs that you can claim for, there are many more home expenses that aren't covered. Home buying tax deductions don't include stamp taxes, appraisal fees, or forfeited deposits. You can't claim the costs of utilities or rent from living in a home before closing. Depreciation on the property also shouldn't be added to your itemized deductions.
While it is going to be more of a chore to itemize your taxes, it could offer a greater tax break over the standard deductions. If you are prepared to do the extra work required, however, you could find yourself with less tax to pay overall.
Final Thoughts on House Buying Tax-Deductions
It is never wise to lose out on deductions that are rightfully yours. Not educating yourself on legal deductions to purchase a home surely isn't smart. Fear is not a great excuse, either. Some folks don't take rightful deductions because they have a fear of getting audited. As long as you don't cheat, taking your legitimate deductions is just plain smart.
Hopefully, you have enjoyed what expenses you'll be able to deduct as a home buyer.
Other Valuable Active Rain Real Estate-Media
See more helpful home buying and selling resources in these recently published articles at Active Rain.
- How to update your change of address - did you just change your address but have found that it needs to be changed again due to your current plans? See what you need to know about making an address cancelation.
- What do you need for a down payment - are you aware of the fact there are now numerous programs where you can buy a house for low and no down payments? It's true. See what you need to know about current down payment rules.
Use these additional resources to make the best decisions when buying or selling your next home.
Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys providing helpful information to buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and others.