Owning a home doesn’t come cheap, but it’s good to know that some of your expenses are tax deductible. If you want to know how you can minimize the cost of owning a home by maximizing homeownership deductions continue reading. Please note that the information presented here is based on IRS rules for the 2015 tax year.
1 . Mortgage Interest
Mortgage interest is deductible for the year it was paid…for both first and second mortgages on your primary residence. This also applies to your home equity line of credit (loan up to $100,000). If you own another home, such as a mobile home or vacation cottage, you can deduct the mortgage interest for it as well, provided you stay there for at least 14 days a year or 10% of the duration it is rented out.
2. Mortgage Points & Insurance
In addition to mortgage interest, you can deduct the mortgage points for your home in the same year you pay them. Points are also known as pre-paid interest (1 point = 1% of the loan). Be careful, though, points paid to refinance a home mortgage must be amortized over the length of the loan. You can also deduct points you pay for a home equity loan. And finally, don’t forget to deduct premiums you pay for private mortgage insurance on your loan, provided you earned less than $109,000 in 2015.
3. Property Taxes
Property taxes are a deductible expense for the year they were paid. Keep your property tax bills as well as the 1098 from your mortgage company .
4. Home Office
You may qualify for a home office deduction if you own a home-based business. However, there are a few conditions you must meet to qualify. Your home should be your primary place of business and you should only use the office space for work.
Generally, there’re two ways of calculating the deduction. The simplified option is to deduct $5 per square foot up to a maximum of 300 square feet. This applies only to your home office area. A more advantageous yet complex method involves dividing your office’s square footage with that of your home, yielding the “business percentage”. The business percentage is then multiplied by allowable home costs, such as mortgage interest and utilities. The final result is your deductible amount.
5. Energy Credit
Implementing energy-efficient improvements can earn you credit of up to 10% of the cost of improvements, up to a maximum of $500. It covers expenses such as new doors and windows, insulation as well as high-efficiency heating & cooling systems. Having renewable energy systems such as solar power can earn you a credit worth 30% of its total cost. You may also be eligible for Colorado tax credits which you can add to you federal credit.
6. Medical Home Improvements
If you suffer from a medical condition that requires home improvements, such as air filter for allergies or a stair lift if you have arthritis, you can deduct some of these expenses. This deduction is limited to the portion of your medical costs exceeding 10% of your adjusted gross income (7.5% for those aged 65 and above).
In most cases, the difference between equipment cost and the increase in home value from the improvement is the only amount you’re allowed to deduct. Some improvements, including widening doorways to accommodate a wheelchair don’t add any marketable value to a home but are deductible provided you meet specific income requirements.
7. Home Sale
If you sold your home last year, you may be eligible for tax savings from the transaction. Title insurance, advertising cost and real estate fees are all deductible expenses. Furthermore, you can deduct improvements made prior to the sale provided you have a taxable capital profit.
8. Home Damages
If your home was damaged by fire, weather, theft, or any other disaster, and the cumulative loss was greater than 10% of your income and wasn’t covered by insurance, you are eligible to deduct the loss. Don’t forget to keep records of the loss for documentation.
As always, you should seek further guidance from your accountant or tax advisor.
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