Tax Benefits Can Ease Cost of Owning a Home
Home ownership brings to mind rewards like the freedom to make the improvements you want, hosting a barbecue on your very own lawn and never having to worry about the landlord raising your rent. What not everyone realizes is that owning a home can also significantly improve your tax situation in a number of ways.
A sizable chunk of the typical mortgage payment is interest, especially during the early years of a loan. Unlike rent, however, the interest portion of mortgage payments can be tax deductible, up to certain limits. To sweeten the deal, those paying for private mortgage insurance, or PMI, might also be able to deduct the cost of those premiums, depending on how much their annual income is.
Own more than one home? As long as the second property has a bathroom, sleeping and cooking facilities and you stay there the longer of 14 days annually or 10% of the total number of days it’s rented out, mortgage interest paid for that property may be tax deductible as well. Even a motorhome or boat may qualify.
If you’ve recently bought a home, or are planning to, the thousands of dollars that can be paid in rate-reducing points may also be tax deductible, often in the year they’re paid. If you decide to refinance, any remaining old points that qualify can be written off that year, but the deduction for new points must be spread out over the duration of the new loan.
Also known as land or real estate taxes, property taxes on primary residences and vacation homes are generally fully deductible in the year paid. Be aware though, that if your property taxes are included in your mortgage payment and held in escrow by your lender, you can deduct only the money that has actually been used to pay your tax obligation. That may be less than what you’ve sent to the lender.
Home equity financing
If you need cash for home improvements or other expenses and opt for home equity financing from a lender like Centra Credit Union, you might get a break at tax time, too. Since these sorts of loans and lines of credit use your property as security for the debt, the interest payments you make on money you borrow against equity — up to $100,000 ($50,000 if married and filing separately) — might qualify for a deduction as well.
Energy efficient upgrades
Going green can save you lots of green on your tax return. Energy efficient improvements may qualify for a Residential Energy Efficient Property Credit. This tax credit, which will be in effect through 2016, is equal to 30% of the cost or eligible projects such as wind turbines, solar electric panels and solar water heaters.
Make sure you take advantage of the tax benefits that come with the costs of home ownership. Then, by tax time next year, you can celebrate your savings by hosting the best backyard barbecue your friends and family have ever seen.
Roberta Pescow, NerdWallet