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Is your market one of a new six where homes have finally fully recovered value lost in the Great Recession?

Tax incentives and issues for homeowners

Think Tank
Eric Zinn,
J.D., LL.M., M.B.A.
Director of the Graduate Tax Program at the University of Colorado Denver Business School
Bonnie Villarreal,
MAcc
Director of Graduate Accounting Programs at
Utah State University Jon M. Huntsman School of Business 

With recent tax code changes, many wonder, "Do I get a tax break for being a homeowner?" While some deductions are limited, it is still possible to take advantage of tax breaks to offset some of the expenses commonly associated with owning a home.

There are a lot more advantages to purchasing real estate than the low mortgage rates we have enjoyed for the past several years. As Eric Zinn, director of the University of Colorado Denver Business School’s Graduate Tax Program, and Bonnie Villarreal, director of Utah State University’s Accounting Graduate Programs explain, a multitude of those advantages come into play during tax season. Furthermore, once you become a homeowner, a simple change in your circumstance can have a huge impact on the taxes you pay and the tax breaks you receive.

What are the tax benefits of home ownership?

Eric Zinn, J.D., LL.M., M.B.A.
University of Colorado Denver Business School

Homeowners should consider at least ten potential tax deductions:

1. Mortgage loan interest deduction

One of the biggest and most important tax incentives involves your actual mortgage payment. Although things have continued to evolve in this category, currently, you can deduct the amount of interest paid through your mortgage loan, within limits.

If you owned up to two residential properties prior to December 15, 2017, and the total outstanding balance exceeds $1 million, you may not be able to fully deduct all of the mortgage interest.

Further, you may not be able to deduct all of the interest on properties purchased after this date if your mortgage loan amount exceeds $750,000, or if you use the borrowed money for something other than purchasing, constructing or improving one of your residences.

If you bought your home last year, you should be receiving a Form 1098 from your mortgage company reflecting the amount of interest, mortgage insurance and any points paid. You'll use these amount so you can make the most of your deductions and maximize your refund.

Home equity loan interest deduction is one of the areas that are changing after 2017. Through the 2017 tax year, however, homeowners can still deduct the interest paid on their home equity loans for amounts up to $100,000.

2. Mortgage insurance premiums

Whether you're paying it in order to cover your automobile, your home, or whatever else, insurance is one of those things that very few people love to pay. This comes as no surprise given that the average mortgage insurance premium in 2016 accounted for $100 - $200 per month.

Lenders typically require mortgage loan insurance when homeowners don't have at least 20 percent equity in their home. The insurance is meant to cover the lender in the event of default.

Fortunately for homeowners, however, you may be able to deduct that mortgage insurance payment on a principal residence or second home.

3. Points and other closing costs

The points you paid when you purchased or refinanced your home last year may be deductible. This is because points, sometimes called loan origination points or loan discount points, are generally paid in order to prepay mortgage interest. Since mortgage interest is deductible, your points may be as well.

Besides points, there may be other closing costs that are tax deductible. But be aware, not all settlement costs/closing costs can be deducted.

So what part of closing costs are tax deductible? It's important to consult an accountant or tax professional to make sure you're getting the best advice with regard to deducting expenses and maximizing deductions for your unique situation.

4. Real estate taxes

Generally you can deduct real estate taxes if you pay taxes either at the time of closing, or to a tax authority such as your county or city tax assessor's office. You can deduct property taxes on your primary residence, your second home, land or foreign property.

It's important to note, however, that you may deduct 2018 property taxes only if they were assessed and paid in 2017. If you purchased your home after December 14, 2017 the amount you can deduct will be capped at $10,000.

5. Home office expenses

If your home is also your principal place of business, you may be able to deduct expenses associated with your home office. You may take the deduction, but you should do so carefully. Some experts warn that large deductions in this category can sometimes trigger an audit.

Generally, the way to calculate your home office deduction is based off the percentage of the home devoted to the office. Deductible home office expenses include a percentage of the mortgage interest, real estate taxes, insurance utilities, repairs and depreciation.

6. Second homes/vacation homes

Homeowners may deduct mortgage interest and property taxes on their second home as long as the property was rented for 14 days or less per year. If any rental exceeds the 14-day limit, the IRS considers the home an income property.

Here's how second home tax deductions typically work. You allocate expenses such as mortgage interest, taxes, insurance, utilities, repairs, and depreciation, between non-deductible expenses associated with your personal use of the home and the deductible expenses associated with the rental.

In any given year, if your allocated rental expenses exceed the rental income earned, you may only deduct allocated expenses up to the amount of rent earned. Any excess expenses may be carried forward and deducted in subsequent years.

7. Moving costs

Homeowners who relocate for a new job that is 50 miles or more from their previous living situation may qualify for a residential moving cost deduction. Deductible expenses include the costs associated with the move and traveling. Meals may not be included.

In order to claim moving expenses, homeowners must file IRS Form 3903.

8. Accidental loss

Homeowners who've had the misfortune of going through a sudden, unexpected or unusual event (property damage as a result of a hurricane for example), may be able to deduct a portion of the loss. In general, if your losses exceed more than 10 percent of your income, you can deduct whatever your insurance doesn't cover.

9. Solar energy

The good news is that some of those energy saving improvements made to your home last year may be tax deductible.

Specifically, if you made any solar improvements, you're eligible for a credit of 30 percent of the total cost, including installation, with no set limit. This credit will drop over the upcoming years so don't wait too long if you're entertaining this idea.

10. Capital gains exclusion

You may exclude up to $250,000 of capital gain ($500,000 for married selling homeowners that file jointly) on the sale of a principal residence.

You'll have to satisfy an ownership test, as well as a usage test. The general rule is this - if you owned and lived in your main home for two out of five years before its sale, you can make up to $250,000 profit when selling and not have to claim that amount on your taxes. Married couples may be able to exclude up to $500,000 in profit.

Can you deduct homeowners insurance on your taxes?

Homeowners generally cannot claim deductible expenses for homeowners insurance, depreciation, or utility costs.

A big reason many of us go from renters to homeowners is because of the tax breaks. As such, you may want to make the most of your tax options come tax time. Knowing what you're eligible for is the first step in saving as much as possible.

Consult your tax professional to endure you're taking full advantage of every tax break available for being a homeowner.

Additional reporting by Craig Berry

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