Improve Your Return: Look For Tax Breaks Hidden In Your Home

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The roof over your head can offer more than shelter: Think tax break.

And you don’t have to be Home Improvement's Tim “The Tool Man” Taylor (DIS) to take advantage of these benefits. There are many ways to up your return, and it’s not just through home improvements (although they can help).

If you’re a homeowner you may be aware of the many tax benefits your home has to offer. But recently a few new wrinkles were added to the tax code. Here is MainStreet's take on homeowner tax saving tips. 


Mortgage Interest

This is one of the most popular tax deductions around. A homeowner can deduct all interest paid on a mortgage as long as the loan doesn't exceed $1 million. The best part is, if you own a second home, the interest may also be deductible. Keep in mind: The combined loan amounts must fall under the $1 million ceiling.

Interest on a second mortgage on your principal residence, a home equity loan or a home equity line of credit also might be deductible. In most cases, equity debts of $100,000 or less are fully deductible.

Points

A loan point is 1% of your loan amount. Points are usually paid in order to obtain a more favorable loan rate. In most cases, any points you pay on the purchase of your principal residence are considered mortgage interest and are fully deducible in the year paid. Even points paid by the seller are deductible by buyer.

Points paid for other home-related debt, such as an equity loan, also may be deductible, but over the life of the loan. An exception is if part of the refinanced mortgage proceeds are used to improve your main home; then you can fully deduct the part of the points related to the improvement in the year you paid them.

Real-Estate Taxes

Property taxes are the other major tax deduction for homeowners. All real estate taxes, regardless of which jurisdiction imposes them, are fully deductible. Unlike the mortgage interest deduction, which is limited to two residences, the property tax deduction is allowed for the amounts you pay on all your personal real-estate holdings.

Improvements

Some specific home improvements could help cut your tax bill. Some necessary structural changes to your residency, such as installing ramps and widening doorways to allow wheelchair access, could be deductible. Eligible costs would be reported on Schedule A as itemized medical expenses. Details on such deductible home changes are detailed in IRS Publication 502, Medical and Dental Expenses.

Home Sale Exclusion

Even if you can't deduct home improvements when you make them, keep track of the costs. If you're able to get top dollar for your home, the information could help reduce the amount of taxable gains. Most sellers, however, won't have to worry about whittling down their profit amount, since the tax code offers a generous break in this regard. A home sale profit of up to $250,000 is nontaxable for single filers; the nontaxed amount is double that for a married couple fling a joint return. There are two requirements to get this tax savings: The house must be your principal residence for two of the last five years, and you can claim this tax break only every two years.

Private Mortgage Insurance

In some cases, private mortgage insurance (PMI) premiums paid during 2007 are considered mortgage interest and therefore are deductible on Schedule A. The PMI must be paid on a home loan obtained in 2007. Also, if your adjusted gross income is more than $100,000 ($50,000 if married filing separately), the amount of deductible PMI premiums are reduced and may be eliminated. This deduction also applies to eligible PMI payments in 2008 through 2010.

Forgiven Mortgage Debt

Some homeowners whose mortgage debt was partly or entirely forgiven may be able to claim special tax relief. Usually, canceled debt is considered taxable income. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude debt forgiven on their principal residence if the loan balance was less than $2 million ($1 million for a married person filing a separate return). This new law applies to transactions from Jan. 1, 2007, through Dec. 31, 2009. To claim forgiven mortgage debt relief, file Form 982 with your personal tax return. 


Lastly don't forget: In the eyes of the IRS, a house can be a single-family residence, a condominium or cooperative apartment, a mobile home, a boat, a recreational vehicle or any similar property that has sleeping, cooking and toilet facilities. And, to take advantage of most home-related tax benefits, you'll have to itemize your deductions on Schedule A.

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