Tax Tips for Homeowners
The joys of homeownership are manifold. You can nail whatever you want to the wall! You can paint a room neon green! You can be financially responsible for an alarming mortgage, personally responsible for house liability issues and emotionally responsible for how sad you get in the summer when all the neighbors around you mow their lawns while you had no intention of getting out there for another week.
Some parts of homeownership are more fun than others.
But don't assume that trying to navigate tax code as a homeowner is a nightmare. There are a lot of great perks for people who own homes, and we're here to help you find them. From your mortgage to your home insurance -- not to mention the intricacies of selling and buying -- let's dive into some simple tips that can help elucidate a few points come tax time.
When it comes to taxes, the eternal question is whether or not to itemize. There's no way around the fact that taking the standard deduction is a heck of a lot easier: The government gives you a nice chunk of relief without any tallying of costs or poring over tax code.
But if you're a homeowner, you might think twice about going the easy way out. Mortgage interest is entirely deductible, and -- depending on your mortgage agreement -- it might make a heftier tax credit than the standard deduction. Since a lot of monthly mortgage checks are going toward the interest of the loan as opposed to the loan itself, this can create a sizable savings. (Keep in mind that the 2014 standard deduction is $6,200 for single people and $12,400 if filing jointly.)
However, remember that you can only begin writing off expenses after you reach 2 percent of your adjusted gross income (AGI). So if your AGI is $60,000, the first $1,200 worth of itemized expenses don't even count.
Property Taxes Are Deductible
In a move that frankly makes no sense, the IRS lets you deduct taxes on your tax return! Seriously.
On your federal tax return, you can claim any state and local property taxes you pay. While you might not realize you're forking them over, you're actually paying state and local property taxes with every mortgage payment. They go into escrow, where the mortgage lender pays them once a year. On your yearly summary, you can look up the cost of property taxes for your listing. Even if you just bought the house, it should list what taxes you paid versus what the old owners paid for the year -- but be sure that you deduct only your amount, of course.
Remember, however, that this only applies to those itemizing their deductions. Take the standard deduction, and you're outta luck.
If something dramatic happened this year to damage your home or property, the IRS will let you account for the loss. You can only write off casualty losses if you itemize your taxes though: They're not above-the-line deductions. Casualty is a pretty broad category, and the IRS says the loss must be caused by a "sudden, unexpected or unusual" event.
As a homeowner, that could range from damage caused by a natural disaster to vandalism. Keep in mind that you can only write off the fair market value of the property; the $1,200 flat-screen TV you bought in 2008 might only be worth $800 now, for instance. The IRS also requires you to subtract some rates from your actual loss ($100 per event, then 10 percent of your AGI) to arrive at your deduction.
Also, don't think that you can receive tax deductions if insurance or a lawsuit covers your losses. You can only claim deductions on unrecoverable losses.
Watch Out for Debt Cancellation
While it would be nice if we could offer nothing but good news and credits for homeowners, we should also offer some fair warnings for those who aren't in great real estate shape.
If you are planning a short sale on an underwater property, be aware that any cancellation of debt is considered income. That can be terribly burdensome. Consider, for instance, what might happen if you owe $250,000 to your mortgage lender and short-sell your home for $150,000. That leaves you with a whopping $100,000 you have to report as income -- and that means you're going to have to pay taxes on it.
Foreclosures work a little differently; if you're personally responsible for the entire mortgage, you'll also be responsible for the cancellation of the debt. Congress has yet to renew the Mortgage Forgiveness Debt Relief Act, which expired in 2013 and allowed some qualified taxpayers to exclude debt from their taxes.
Sell Sell Sell
Keep in mind that it's not just owning a home that can help you out come tax time: Selling your house also has some advantages. Not that it's necessarily a terrific idea to sell your home just to collect some tax savings, but you might as well take advantage of them when you can.
Did you advertise your sale in any way? You can write it off. Did you buy title insurance? Write it off. You can even claim some repairs if they were performed during a certain time period around the sale. Perhaps even more impressive? If you make under $250,000 ($500,000 for married couples) in profit from the sale, it's not taxable. Keep in mind that you will have to live in the house for at least two out of five years of ownership to qualify. (For those keeping track, that means you have to own it for at least two years.)
By Kate Kershner for HowStuffWorks