Home ownership is a big a part of the American Dream. When that dream becomes a reality, there are many great tax breaks that can come along with it. This tax season, I wanted to pass along a few tips from my friends at Jackson Hewitt Tax Service about the many credits and deductions that can add thousands of dollars to your refund.
“There are a wide variety of tax breaks available to existing homeowners and first-time homebuyers,” Mark Steber, chief tax officer at Jackson Hewitt Tax Service, explained in a statement. “Speaking with a local, knowledgeable tax preparer can help ensure taxpayers take advantage of all the home ownership-related credits and deductions for which they are eligible.”
For homeowners, Mr. Steber notes that there are several tax breaks available covering home-related areas, such as:
The amount of mortgage interest paid on a principal residence or second home is deductible and generally reported on Form 1098. Taxpayers can also deduct all the points paid to purchase the residence, even if some have been paid by the seller. If certain requirements are met, the points may be deducted in full in the year paid. Otherwise, they may be deducted over the life of the mortgage. Seller-paid points that taxpayers claim as an itemized deduction reduce the cost basis of the home.
Buying a Home
Most of the expenses incurred when buying a home are not deductible. However, there are certain closing costs that are added to the basis of your residence. Keeping track of the basis of your home is important because when selling, it is needed to calculate any gain or loss.
Taxpayers may deduct real estate property taxes in the year paid. They may be reported on Form 1098, the annual statement from the financial institution holding your mortgage. Taxpayers may also be able to deduct some of the taxes paid during closing. The taxes must be the responsibility of, and paid by, the taxpayer.
There are energy credits available for making energy efficient changes to a home. For 2011, the credit is limited to 10% of the cost of improvements, up to a lifetime total of $500. The credit will be further limited for each category of improvement.
Home improvements are not generally deductible on a tax return. Instead, the cost of improvements is added to the basis of the home and helps keep any gain below the $250,000 ($500,000 if married filing jointly) exclusion amount when the house is sold.
For those who find themselves in the unfortunate position of a foreclosure or short sale on their home, there are tax breaks available as well. Foreclosures and short sales are treated as both a home sale and a canceled debt. When the house is a taxpayer’s primary residence, and they have lived in and owned the home for two of the last five years, any gain up to $500,000 on the disposition is tax-exempt. In addition, the canceled debt (mortgage still owed) is excluded from taxable income, as long as it is less than $2 million and is for the taxpayer’s principal residence.
To learn more about home ownership-related tax benefits, please visit www.jacksonhewitt.com or call 1-800-234-1040 to find a local Jackson Hewitt office.
Knowing my about the tax benefits of home ownership is your Warrendale Tip of the Week.