You can’t avoid paying taxes, and we all need to pay our fair share. However, paying your fair share shouldn’t place an unjust burden on you. As a homeowner, your tax burden is doubled because you pay both income and property taxes. To decrease that burden and boost your tax savings, take advantage of these homeowner tax deductions. As a result, you can use your tax savings to go on a vacation, increase your child’s college fund, build upon your retirement fund, or complete another home improvement project.
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Homeowner Tax Tips
Even if you’re having a professional help you with your income tax return, you need to provide them with information on the money you spent that might be deductible. Look at the following list of homeowner tax tips to see if any of these things need a little more investigation to determine if they apply to your situation.
Raise the Basis and Lower the Gain
Homeowners can raise the basis or cost in their home by money spent on capital improvements. The benefit is that it will lower their gain and may save them taxes when they sell their home.
Improvements must add value to your home, prolong its useful life or adapt it to new uses. Repairs are routine in nature to maintain the value and keep the property in an ordinary, operating condition. They do not raise its basis.
Continue reading Raise the Basis and Lower the GainRecord Capital Improvements Now
There is a significant difference in how the money you spend on your home is treated for income tax purposes. Repairs to maintain your home’s condition are not deductible unlike those made by rental property owners that can be deducted as an operating expense.
On the other hand, capital improvements to a home will increase the basis and affect the gain when you sell which may save taxes.
The Question Every Cash Buyer Should Answer
Paying cash for a home seems like a huge advantage to qualifying for a mortgage and an appraisal. However, for the fortunate few who don’t need a mortgage and are cash buyers, there is a question they should answer before they make that decision: Do you think at any point in the future, you might put a mortgage on this property?
It’s important because paying cash for a home could affect the ability to deduct the interest if the homeowner should place a mortgage on the home at a later date.
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Energy Efficiency Tax Credit Expiring Soon
The energy-efficient home upgrades tax credit is scheduled to expire on December 31st this year. If you need to make improvements to your home, this could be an incentive to do it before the end of the year. If you have already made qualifying improvements without realizing the tax credit is available, it may seem like a holiday gift you weren’t expecting.
Shifting Debt to Tax Deductible
The Mortgage Interest Deduction is available to homeowners for up to $1,000,000 of acquisition debt on the combination of their first and second home. They can also deduct interest on up to an additional $100,000 of Home Equity debt.
While Acquisition Debt is used to buy, build or improve a principal residence, the Home Equity Debt can be used for any purpose. It can be used for educational or medical expenses, to purchase a personal car or boat, consolidate debts or pay off credit cards.
A homeowner with $15,000 of credit card debt at 19% and sufficient equity in their home could replace it with a home equity loan at much lower interest rate. Not only would the interest rate on the home equity loan be about 1/3 of the rate paid on the credit card, it’s would now be tax deductible.
If the taxpayer was in the 28% bracket, the net interest on a 6.5% loan would be 4.68% after tax benefits are considered.
Shifting personal debt to Home Equity debt can result in an interest deduction and probably, a lower interest rate. For more information see IRS Publication 936 page 10 and consult your tax professional.