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10 Ways To Cash In On Your Home
By Jane Hodges
Special to The Seattle Times
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Homeownership carries lots of responsibilities and occasional expenses.
But at tax time, owning almost always trumps renting. That's because
Uncle Sam lets homeowners take a laundry list of deductions or exemptions
on everything from mortgage interest and capital gains on a sale to
maintaining a home office or even renting out a second property.
Aside from deductions, home ownership may allow for tax credits and other
benefits, too. Here's a look at deductions available to many
homeowners. Some apply for 2006; others you can prepare for in advance of
taxes filed for 2007. Not all deductions will be available to all
homeowners, and some might work only for homeowners who itemize their tax
deductions. But it never hurts to run through the options with your
tax preparer or the Internal Revenue Service
www.irs.gov /
1.800.829.1040. |
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1: Home-loan interest
You can deduct the interest portion of your
mortgage payments each year. According to the National Association of
Realtors, only about one-third of all taxpayers itemize (i.e., catalog)
their deductions on their returns; of those who do, at least 60 percent
deduct mortgage interest. For some homebuyers, the increased costs
of owning versus renting are often offset by this significant deduction,
which has been available since 1913. It applies to the interest from
both your primary mortgage and any second mortgage you may have on a
property, such as a home-equity or home-improvement loan.
2: Points on a
loan
Points amount to 1 percent of a loan's principal, and lenders may charge
points as part of your loan. You can deduct points on the purchase of a
home but not points related to a mortgage broker's fees. Deductions
for points can take place when you purchase a home or refinance a home
loan.
3: Property tax
Local and state-level property taxes get a full deduction. However, if you
are disabled, elderly or own a property eligible for listing on a local or
national registry of historic places (see related story), you may be
eligible for property-tax exemptions or reductions in the total amount of
property tax owed.
4: Capital
gains
Single homeowners need not pay taxes on the first $250,000 of profit, or
capital gains, on the sale of their home. For married homeowners, the
figure is $500,000. To take this exemption, you need to have lived
in the property for at least two of the past five years. For more
information, see IRS Publication 523, available online at
http://www.irs.gov/publications/p523/index.html.
5: Home office
Homeowners can deduct a percentage of their home's costs proportionate to
the percentage of the home used as an office. If you use 10 percent
of your home to keep an office or to run a home-based business, you can
deduct, for instance, 10 percent of electrical bills. You can also deduct
for repairs, renovations, furnishings or other expenses related to the
home-office space. The deduction has a reputation as a red flag for
auditors, but that's not been proved. To make sure you're using it
correctly, keep in mind the IRS expects you to create a dedicated space as
a home office. In other words, that desk in the corner of the family
room is not necessarily a home office, but a spare bedroom used
specifically for an office counts. For more information, see IRS
Publication
www.irs.gov/pub/irs-pdf/p587.pdf.
6: Home-sale
expenses
Sellers can lower capital-gains taxes by deducting agents' commissions,
legal costs, title fees, marketing and inspection fees. You may also
deduct repairs and renovations completed up to 90 days before you list the
home for sale, if those repairs were done to make the home more
marketable.
7:
Energy-related tax credits
Homeowners who upgrade their properties with energy-efficient heating or
cooling systems, windows, doors, insulation and other systems designed to
reduce energy waste may be eligible for tax credits. Those who use
solar energy or other alternative energy systems may also be eligible for
breaks. According to Energy Star, an organization promoting energy
efficiency, the maximum tax credit for all improvements is $500 during the
two-year period of the credit, which applies to property improvements made
between Jan. 1, 2006, and Dec. 31, 2007.
For more information, see Energy Star:
www.energystar.gov/index.cfm?c=products.pr_tax_credits#s2.
8: Moving costs
Buyers and sellers moving at least 50 miles from their last address and
who move within one year of starting a new job may deduct moving costs,
storage costs or moving-related travel costs such as lodging and food.
To qualify, you must prove you've worked at least 39 of 52 weeks at your
new job once the move is complete.
9: Mortgage tax
credits
For lower-income buyers planning to get into their first home this year,
now's the time to investigate whether you're eligible for a federal tax
credit for up to 20 percent of mortgage interest paid on the home when you
file 2007 taxes. This state program requires that buyers secure a
mortgage-credit certificate. The certificate program has rules about
minimum and maximum household income, prices of homes purchased and
locations of the homes. However, many of these restrictions are
shifting, especially with respect to the location, says Dee Taylor,
director of the Washington State Finance Commission. "We're
relaunching this," Taylor says. "This is an incredibly powerful tool."
Here's how it works: Buyers who expect to pay $6,000 in mortgage interest
during a year of ownership would, under the program, qualify for a federal
$1,200 tax credit (20 percent of the mortgage interest total) and pay only
$4,800 in mortgage interest. The $4,800 in mortgage interest paid
would still be deductible, Taylor says. "Under this program you
don't make more money, but you keep more disposable income," Taylor says.
Buyers hoping to qualify for mortgage-credit certificates must seek them
out before closing on their home loan. To date, lenders originating
loans that carry the credit include Countrywide Home Loans, Eagle Home
Mortgage, First Mutual Bank, HomeStreet Bank, National City Mortgage and
Seattle Metropolitan Credit Union. For more information, check:
www.wshfc.org/buyers/MCCprogram.htm.
10:
Vacation/Second home
If you own a second home, you are eligible for many of the same tax breaks
that apply to a primary home — deductions for mortgage interest and
property taxes, capital-gains exemptions, etc. That's because the
IRS allows the above-listed deductions on one primary home plus one second
home. What that second home means to you, however, determines the
extent of the deductions you're allowed to take. If you rent the
second home out, you will need to decide whether you are, for tax
purposes, treating the place as investment property (renters spend more
time in it than you) or as a personal retreat (you spend more time in it
than renters). Deductions will differ depending on your decision.
The IRS has a "14-day test" to help you determine how to classify your
property. If you use the home fewer than 14 days a year, or less
than 10 percent of the days it's rented to outsiders each year, whichever
is greater, your home is an investment property. If you use the home
15 or more days a year, or more than 10 percent of the time you rent it
out, it's a "second home." Your "workdays" on the property (i.e.,
days spent doing maintenance) don't count toward the 14-day test. If
your property counts as a second home, you can collect 14 days of rent
without paying taxes on that income, as well as many of the same
deductions you get on your primary home. If your property counts as
an investment property, your returns may become more complex. This
means the home has taxable income (from renters), as well as operating
costs (maintenance, advertising, management-firm fees, etc.), depreciation
and a total profit or loss each year. You can reflect this on your
taxes in the form of deductions. If you historically used the home
one way (say, as a vacation retreat) and are shifting use (say, renting
that vacation place out all season), talk to a tax professional about how
to document the shift on your tax forms and with deductions. The
book "How to Rent by Owner" by Christine Hrib Karpinski offers many tax
and other financial tips for vacation-home owners. The Web site is:
www.howtorentbyowner.com.
Jane Hodges
Copyright © The Seattle Times Company
Saturday, February 17, 2007
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