3 Tax Benefits of Homeownership

If you own a home, or sold one in the previous year, you may be entitled to tax breaks.

Tax Benefits of Homeownership

Owning real estate can make tax season more complex, but many homeowners receive considerable benefits — especially if they sold a home or relocated for a job in the previous year. Here’s a look at three ways homeownership can pay off at tax time.

Mortgage interest

When you purchase a home, you will likely get a mortgage. Your monthly mortgage payment is made up of both principal (paying money to pay down the loan) and interest (what the lender charges for supplying the loan). As a way to incentivize homeownership, the federal government provides a tax benefit when it comes to the interest portion of your mortgage payment.

A homeowner can write off, dollar for dollar, the interest portion of their mortgage payment. Say, for example, a homeowner’s annual salary is $100,000. Their mortgage payment is $1,200 per month, and the interest portion of that payment is $1,000. At the end of the year, they have a $12,000 tax write-off. In essence, their taxable income is reduced to $88,000.

Capital gains

Homeowners also get a tax break when they sell their home. If you purchase your home for $200,000 and sell it for $400,000, you have a $200,000 gain — that’s income.

If you have an income by way of a job, a contract position or the sale of stock or mutual funds, you pay income tax on that gain. With homeownership, it’s different. If you are single and lived in the home for at least two of the past five years, you do not have to pay any income tax on that $200,000 gain — in fact, you don’t have to pay on gain up to $250,000. Married couples filing tax returns jointly and following the same owner occupancy guidelines are exempt up to $500,000. Where else can you generate income without paying taxes on it?

Tax credits for moving

If you purchase a home in one state and sell one in another, you should check with a CPA in both states. There may be benefits realized in one state but not the other, such as tax credits for moving expenses, if the move is a part of a job transfer. And, for the year you are between states, you will likely need to file a return in each state. It’s always smart to check with a CPA before a real estate transaction.

Published by Brendon DeSimone on Zillow Blog.

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5 Tax Mistakes New Homeowners Make

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Few people look forward to tax season, and when you’re a new homeowner, filing can be even more daunting. Suddenly, you have new forms to fill out and more potential for making a mistake.

But taxes aren’t all bad; homeowners get more tax benefits than renters. And if you can avoid these five common mistakes, you’ll survive tax season.

1. Not tracking your home improvement expenses

If you bought a fixer-upper and you’ve put money into improving your home, you should be keeping a detailed record of your expenses.

Some home improvements—like installing energy-efficient features or building an entrance ramp—may qualify for tax deductions. Other home improvements won’t qualify for an immediate tax deduction, but they can help you when you sell your home.

Under the home sale exemption, home improvements increase your basis in your home, which lowers the taxable amount of your sale price. The exemption can save you money, but you’ll need receipts and records to prove you made upgrades in your home.

2. Using the home office deduction incorrectly

The home office deduction is complicated and can get the attention of the Internal Revenue Service, potentially resulting in an audit.

To avoid mistakes, get a tax professional’s help or opt for the new simplified home office deduction. This deduction allows you to skip the complicated aspect of the home office deduction like calculating office space.

3. Filing the wrong year

Many new homeowners mix up the dates. Several taxing authorities are a year behind on taxes. This means, for example, when you file in 2015, you’re actually filing for the 2014 tax year. If you choose the wrong year, you could end up filing the wrong amounts and that may lead to a lower-than-expected refund or even an audit.

4. Deducting your full escrow balance

If you’ve been putting money into escrow throughout the year, be careful with how much you deduct on your taxes. Many homeowners simply list their full escrow balance, but not all of your funds in escrow are used to pay taxes.

Before you file, contact the escrow account manager and find out the exact amount of taxes paid from your escrow, then list that amount.

5. Not itemizing

If you’ve been working one job and renting for years, you’ve likely been able to file your taxes using the simplest form, the 1040EZ. But opting for the simple form once you’re a homeowner could cost you.

Homeowners receive a host of tax deductions and benefits that might lower your tax obligation and increase your refund, but you’ll have to file a long form to get most of those benefits. If you aren’t sure which is the better deal, ask a tax adviser for help.

This article was published by Angela Colley on realtor.com.