Tax considerations for homeowners

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–Please note this information is accurate to the best of our knowledge, but Internal Revenue Service (IRS) regulations are extremely complex. Consult with your tax specialist for the most up-to-the-minute rules.  The IRS publications referred to are available online at www.irs.gov.–

There’s a lot of satisfaction and security in owning your own home and home ownership has long been a goal for many Americans. In fact, this goal is supported by Congress through a variety of tax regulations. One of the most prized is the mortgage interest deduction, but there are other tax-reducing strategies available as well. Some come in the form of deductions, others as outright tax credits.

Mortgage Deduction

Generally the interest paid on your mortgage is deductible each year on Form A of your 1040 tax return. To be able to take this deduction, the debt must be secured by your main home or your second home. A home can be a house, a condominium, a mobile home, or house trailer. It can even be a recreational vehicle, boat or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home that is not your main or second home may be deductible if the loan funds are used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

If you pay at least $600 of mortgage interest in a year on a single mortgage (including certain points and mortgage insurance premiums) you will generally receive a Form 1098 or similar statement from the mortgage holder by January 31st of the following year. A copy is sent to the IRS. The statement should show the total interest paid during the year plus mortgage insurance premiums you paid and, if you purchased a main home during the year, it will show the deductible points paid during the year, including seller-paid points.

As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. (“Points” are the charges paid by a borrower to obtain a home mortgage and are sometimes called loan origination fees, maximum loan charges, loan discount, or discount points.) Some points not shown on Form 1098 may be deductible either in that year or over the life of the loan.

Other considerations

In some cases, you may have a “divided use” home. If so, you must allocate on a percentage basis (generally based on square footage) between the part used for residential living and, for example, a home office or studio. The percentage of home mortgage interest for the portion used for business is usually deductible on Schedule C.

Renting out a portion of your home for more than 14 days in a year (with some other factors involved) also affects how you may allocate mortgage interest payments.  Refer to IRS Publication 527: Residential Rental Property.

Full-time rental of a portion of your dwelling has different tax implications from short-term rentals through a service such as Airbnb or VRBO. These companies must send out a 1099-K showing the total gross earnings for the year. Some expenses such as cleaning fees, rental commissions, and extra insurance may be deductible from the rental income, but there are likely to be some confusing decisions to make on your income tax return.

For more information, check IRS Publication 936: Home Mortgage Interest.

Home office

The Internal Revenue Service has a reputation for close scrutiny of home-office tax deductions. In fact, some taxpayers don’t take this deduction for fear of triggering an audit. But a legitimate home-office deduction—available for both homeowners and renters—can make a nice difference at tax time.

Regulations are complex, but are spelled out in IRS Publication 587: Business Use of Your Home. Your home office, with some minor exceptions, must be your principle place of business and used exclusively and regularly for your business. While the home office deduction cannot be used to create a loss, expenses may be carried forward.

“Regular” means use that’s more than occasional. “Exclusive” means no personal use allowed. For example, a dining room used both for meeting clients and family meals is not eligible for the home-office deduction. If you host overnight guests in your spare bedroom office, it is no longer eligible.

If you aren’t tax savvy and will be deducting a home office for the first time, you may wish to consult a tax specialist. On the other hand, if you have been doing your own taxes for a while, tax software programs can guide you effectively through the required forms.

Energy-related tax credits

Installation of energy-efficient equipment such as storm doors, extra insulation, or upgraded heating and air-conditioning systems may be eligible for a tax credit of up to an overall total of $500. (It need not all be taken in the same tax year.) Equipment using renewable energy sources such as solar or wind are eligible for tax credits of up to 30 percent of the cost with very generous caps.

Of course, if you itemize, property taxes are also deductible. So take a good look at your tax return this year to maximize your tax benefits.

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By Marilyn Pribus

Marilyn Pribus and her husband live in Albemarle County near Charlottesville.  They made use of an energy-related tax credit when they bought a wood stove for their home.

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