Paying taxes is certainly guaranteed in life. But you can get a break now and then in the form of deductions or credit. Whether you’re a first time home buyer or an experienced home owner looking to renovate, the IRS allows a number of tax advantages you can use related to your home. Let’s take a look at the most common benefits.
First-Time Buyers and Taxes
Your first home purchase is a great financial milestone. Since you’ll have new expenses you’ve never worried about previously, including additional taxes, be sure to understand that you also have tax savings opportunities as a home owner.
Mortgage deduction. First-time buyers should know that their big monthly mortgage payment has an upside. The mortgage interest portion of that payment is tax deductible. Loans are devised so that you’re paying mostly interest (as opposed to equity) in the first few years. That means the majority of your payment will be tax deductible.
Property tax deduction. Property taxes are payments the first-time home buyer didn’t have to worry about when renting. The good news is that they are tax deductible as well. While property taxes can go up over the years, at least there is some solace in knowing that the tax deduction will equally increase.
Charitable contributions deduction. Charitable contributions are possibly a new benefit to you on your taxes. If your standard deduction was greater than your itemized deductions, you didn’t reap the benefit of anything itemized. But as a home owner, mortgage interest and property taxes alone usually make you eligible for itemization and additional deductions, including charitable contributions. So if you tithe at church, give to regular causes, or donate clothing to the Vietnam Veterans, you can receive a tax benefit for your generosity.
Closing costs deduction. Save your Closing Disclosure paperwork after the closing of your new home. When you file your tax return for the first time after buying your home, additional expenses listed on the Closing Disclosure, such as private mortgage insurance (PMI) and any additional prepaid interest (points) you paid on your loan, may be tax deductible.
Home Renovators and Taxes
If you’re interested in renovating your home, you’re probably concerned about how quickly expenses can add up. You’re tired of living with that strange layout in the kitchen and you want to replace the countertops and cabinets. Or two of your bathrooms are terribly outdated and you want to bring them up to contemporary standards and add some luxury. All of these kinds of renovations present significant costs. And while these types of renovations will help the resale of your home eventually, they are not guaranteed to pay for themselves when it’s time to sell. With this in mind, a lot of folks wonder if they can deduct home improvements from their taxes.
Deducting interest of borrowed funds. Unfortunately you can’t deduct the actual cost of your home renovation from your taxes. But here’s something to seriously consider. Instead of putting any of your renovation costs on a credit card where you’ll accrue interest payments, get a home equity loan. The interest you pay on that kind of credit will likely be lower than your credit card interest, and the interest on the home equity loan is tax deductible. (The interest on a credit card is not.) That is one smart way to save if you’re borrowing money to fund your renovation.
Energy efficiency tax credit. Another way to save is through buying energy efficient appliances, windows (including energy efficient blinds), doors, and even insulation. Since 2010, you’re able to claim a tax credit up to $1,500 for these kinds of energy efficient products for the home. This is even better than a tax deduction because it reduces the amount of tax you owe on a dollar for dollar basis. And don’t forget, the energy efficient products reduce your energy bills for the long-term.
When it’s time to sell your home, obviously you’ll consider all of your improvements and your energy efficient upgrades when you set a price. This will be your ultimate opportunity to get back as much as you invested, and will depend, of course, on your local market conditions. Even if you only get back a portion of your renovation costs, don’t forget to take into account that you were able to enjoy the life improvement benefits of your home renovation while you lived there.