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 homes. 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.
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