Tax Breaks for Owning a Home

I often get questions about how to reduce your taxes, so today I want to share an informative article I read on Kiplinger.

You probably know that interest on your home mortgage is deductible, and interest on a home-equity loan or line of credit is usually deductible, too. But that’s not the only way owning a home can cut your taxes.

Deduction for mortgage insurance premiums. Lenders typically require home buyers who put less than 20% down to buy private mortgage insurance. If you paid PMI last year, your premiums are deductible, as long as your adjusted gross income—whether you’re single or married filing jointly—didn’t exceed $109,000 and you took out your loan after 2006. The National Association of Realtors says this often-overlooked tax break saves the average homeowner $3,000.

Deduction for points. When you buy a house, you get to deduct all at once points paid to get your mortgage, which can add up to a sizable tax break. When you refinance, the deduction is more complicated because you’re required to deduct the new points over the life of the loan. If it’s a 30-year mortgage, for example, you can deduct one-thirtieth of the points per year. That may not sound like much, but keep track. When you pay off the loan—because you either sell the house or refinance again—you can deduct all undeducted points. Unless, that is, you refinance with the same lender. In that case, you add the new points to those left over from the previous refinancing and deduct the combined balance over the life of the loan.

Energy-saving tax credits for home improvements. This may be your last chance to claim a tax credit for installing new energy-efficient windows or making similar energy-saving home improvements. You can receive up to $500 in total tax credits for eligible home improvements made since 2006. The credit applies to 10% of the purchase (not installation) cost of certain insulation, new windows, external doors and skylights. There are limits on specific projects—for example, the maximum you can claim for new windows is $200. For details, go to www.energystar.gov. Unless Congress renews them, these tax breaks are limited to home improvements made before December 31, 2013.

Energy-saving tax credits for big projects. If you embark on a more ambitious energy-saving project, you may qualify for a larger tax credit. You can claim a credit for up to 30% of the cost of buying and installing geothermal heat pumps, solar water heaters, solar panels and small wind-energy systems. This credit doesn’t expire until December 31, 2016.

Tax-free capital gains on home sales. Married couples can shelter up to $500,000 in taxes on the sale of a home, as long as both spouses lived in it for two out of five years before the sale. For single homeowners, the maximum amount of tax-free profit is $250,000. To claim the entire exclusion, you must file a joint tax return, and you or your spouse (but not necessarily both) must have owned the home for two out of the past five years.