Homeowners can claim a slew of write-offs to lower their tax bills. There are deductions for mortgage interest, mortgage points and real estate tax payments. And when you sell your home, most likely, you won’t have to pay taxes on the profit. If you bought a home last year, you might even get to write off expenses you didn’t pay. So make sure you get all the tax breaks you have coming.
Here’s a rundown:
Boats as homes. A boat that has eating, sleeping and sanitary facilities can qualify as a first or second home, so you can deduct mortgage interest paid on the loan secured by the boat to buy it. But if you are subject to the alternative minimum tax, this write-off is not allowed.
Canceled debt on foreclosure or short sale. Generally, when a debt is canceled or forgiven, the borrower is considered to have received taxable income equal to the amount of the canceled debt. But through 2012, up to $2 million of debt discharged on a mortgage on a principal residence — in a foreclosure, for example, or short sale — can be tax-free.
Casualty loss. If your home was damaged or destroyed — by fire or storm, for example — you might be able to get financial help by deducting a casualty loss on your return.
Depreciation on home. Profit due to depreciation claimed on your residence before May 7, 1997, because you had a home office, for example, or at one time rented out the property, qualifies for the rule that lets you treat $250,000 of home sale profit as tax-free income. (The limit is $500,000 if you’re married and file a joint return.) Profit due to depreciation after May 6, 1997, is taxed at 25 percent, unless you’re in a lower tax bracket, in which case that rate applies.
D.C. first-time homebuyer credit. If you bought a home in the nation’s capital during 2010, you might be eligible for a $5,000 tax credit. It doesn’t really have to be your first home, just a home you purchased in the District of Columbia after not owning one in D.C. for at least one year. It doesn’t matter if you have owned a home elsewhere. This break phases out as income exceeds $70,000 on single returns and $110,000 on married-filing-jointly returns. See first-time homebuyer credit. If you bought during the part of 2010 when the nationwide homebuyer credit was available, you must choose between the two credits. You can’t claim both.
Energy credits. You can earn a tax credit for energy-saving home improvements such as new doors, new windows, energy-efficient furnaces, heat pumps, water heaters, air conditioners and the like that were installed in 2009 or 2010. The credit is 30 percent of the cost of installing such energy savers, up to a maximum credit of $1,500. For windows and doors, the credit is based on the cost of the materials; for furnaces and air conditioners and the like, you can count the cost of installation, too. A bigger credit is available for more ambitious projects — like solar water-heating systems, geothermal heat pumps and residential wind energy systems. Start generating your own power, and Uncle Sam will rebate 30 percent of the full cost of your system, with no dollar cap.
First-time homebuyer credit. If you bought a home during the first four months of 2010, you might qualify for either an $8,000 or $6,500 homebuyer credit. And you don’t really have to be a first-time homebuyer to qualify for either credit. To qualify for the $8,000 credit, you (and your spouse, if married) must not have owned a home in the three years leading up to the purchase of your new home. The credit is 10 percent of the purchase price of the home, up to a maximum credit of $8,000. No credit is allowed for homes that cost more than $800,000.
To qualify for the $6,500 credit, you must be a longtime homeowner, defined as owing and living in the same principal residence for five of the eight years leading up to the purchase of your new home. The credit is 10 percent of the purchase price of the home, up to a maximum credit of $6,500. No credit is allowed for homes that cost more than $800,000.
To qualify for either credit, you must have signed a binding contract on your new home before May 1, 2010, and you must have closed on the deal by Sept. 30, 2010.
Unlike a first-time homebuyer credit available in 2008, which had to be paid back over 15 years by adding $500 in each of those years to the taxpayer’s tax bill, the 2010 credit does not have to be paid back, as long as you live in the principal residence for at least three years.
First-time homebuyer credit repayment. The $7,500 first-time homebuyer credit that was available for qualifying purchases after April 8, 2008, and before Jan. 1, 2009, must be repaid starting with your 2010 tax return. To repay this “interest-free loan,” you must add $500 each year to your tax bill until the full $7,500 is repaid. If you sell or otherwise stop using the house as your home before the credit is fully repaid, any remaining balance must be repaid with your tax return for the year of the sale.
Home equity debt. Interest on up to $100,000 of debt secured by your first or second home — using a second mortgage, say, or home equity line of credit — can be deducted, regardless of how the money is used. The use of home equity debt gives homeowners an opportunity to skirt the rules that generally block the deduction of debt used to buy automobiles, for example, or pay for vacations.
Home office deduction. You can deduct the costs of a home office that you use exclusively and regularly for business. This includes depreciation, utilities and insurance for the office portion of your home. To qualify, you must either meet with clients there regularly, or the home office must be your principal place of business (unless it is not attached to your house).
Home sale exclusion. Up to $250,000 of profit from the sale of your home can be tax-free; $500,000 if you are married and file a joint return. To qualify, you must own and live in the house for periods totaling two years out of the five years leading up to the sale. A reduced exclusion is available if you fail the two-year test because of unforeseen circumstances such as a move resulting from a job change, for example, or divorce. You can use this exclusion any number of times, but no more frequently than once every two years.
IRA payouts for first-time homebuyers. You can withdraw as much as $10,000 from a traditional IRA before age 591/2 without penalty if the money is used to buy the first home for yourself, a child or grandchild, or your parents or grandparents. Although the payout avoids the normal 10 percent early withdrawal penalty, it is taxed. Different rules apply to tapping a Roth IRA for the purchase of a home.
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