Tax season is upon us, and homeowners everywhere will reap the benefits of tax breaks and incentives. Homeowners and potential home buyers should know what expenses are deductible and the ins-and-outs of new tax laws. Always check with your CPA about your personal situation.
1. Deduct the interest you pay on your home loan on your tax return. A mortgage interest deduction reduces your taxable income. And because your mortgage payments for the first few years are heavily comprised of interest, they are almost entirely deductible.
2. Deduct property taxes and points you paid to lower your loan’s interest rate. The IRS offsets the expense of your state and local property taxes by allowing you to deduct those fees from your itemized income tax return. You may also get a tax benefit if you paid “points” at closing to lower your mortgage interest rate.
3. Take advantage of new laws in a challenging market. Look into new tax laws that may allow new homebuyers to get an $8,000 tax credit, short sellers to escape penalty for forgiven mortgage debt, and homeowners to contest property taxes in a struggling market.
4. Request a property tax reassessment if your home’s market value has declined. If your property value is significantly lower now than when you bought it, show proof of your home’s current market value and recent comparable sales in your neighborhood to your local tax assessor for a tax adjustment.
5. Research past and proposed assessments that may apply to your home. Understanding property taxes and assessments in your area will give you a more accurate homeownership cost, as well as help you predict and control your monthly expenses.
6. Get a reliable estimate of your property tax bill. Don’t rely on the old tax data passed down from your home’s previous owners. Depending on the circumstances of the sale, your tax bill can differ from their bill.
7. Wrap your property taxes into your monthly mortgage payment. If you’re daunted by that huge tax bill once or twice a year, consider setting up a convenient escrow account. (As this also protects the lender, they are more than happy to do the work.)
8. Understand how capital gains tax is calculated. When you sell your home, you’re taxed on any profit over $250,000 if you are single, $500,000 if married. But in calculating your gains, the IRS takes into account the money you put into improving the home. Remember to save receipts for any repairs and upgrades.
9. Know how your tax situation changes with every real estate move you make. Whether you’re buying or selling a home, refinancing, or renting your investment property, understand how these situations affect your taxes.
10. See if homeownership lowers your tax liability. Your tax situation varies depending on your stage in life. Upon examining your payroll withholdings, opt to reduce them to be in line with your net tax liability, which will put more money in your pocket each pay period.