Now is the time of year when people look for ideas on how to reduce the amount of
income tax they’ve just paid. If you’re one of those people and you’re not a homeowner,
consider these six ways buying, owning, and selling a home can cut your taxes.
Mortgage interest tax deduction. A tax deduction is an amount you can subtract from
your taxable income, which will then reduce the tax you owe. Homeowners are allowed
to deduct the interest they paid (up to certain limits) on loans they took out to buy, build,
or remodel their home. That interest must be for a secured debt on a home you own
and you must itemize deductions on IRS Form 1040, Schedule A, Itemized Deductions.
Interest deduction on second mortgages. The mortgage interest deduction also
applies to second mortgages. These include home equity loans, home equity lines of
credit (HELOCs), home improvement loans, and refinanced mortgages. For these
loans, you can deduct the interest paid up to $375,000 of the total debt, or up to
$750,000 for married couples filing jointly.
Other mortgage tax deductions. You may also deduct late payment charges,
prepayment penalties, and prepaid interest, such as mortgage points or loan origination
fees. Plus, if you pay mortgage insurance premiums because your down payment was
less than 20% of the purchase price, and you took out your loan after 2006, you may
deduct all or part of those premiums, depending on the amount of your adjusted gross
income.
Real estate tax deduction. You may deduct state and local real estate taxes up to
$5,000, or $10,000 for married couples filing jointly.
Tax credits. Homeowners may also qualify for certain tax credits for installing energy
saving equipment in both primary residences and second homes. Tax deductions
decrease the amount of your income that can be taxed, but tax credits cut the total
amount of tax you owe. So, credits can be even more valuable than deductions. Go
to this page on the IRS website for more information.
Capital gains tax exclusions when you sell. When you sell any asset for a profit, you
are subject to a capital gains tax. But if that asset is your home and you made a profit
on its sale, if you have lived in it for two of the previous five years, you can exclude from
taxation up to $250,000 of the profit, or $500,000 for married couples filing jointly.
NOTE: This content should not be considered financial or legal advice. ALWAYS
consult a local tax professional before making any tax-related decisions.
If you are looking at buying or selling, give me a call at 505-639-2090.
Mary Cockburn
MaryCockburn.Realtor@gmail.com
