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- Buying your own home is one of the best tax-free investments available. Any gain on the sale of your home is excluded from taxable income if you have lived in the home for two out of the past five years. The exclusion can be used as many times as you want in your lifetime, the only restriction being that the exclusion can only be used once every two years. An added bonus is that you don't have to keep every single home improvement receipt in order to know what the basis of your home is anymore. You also don't have to fill out any forms on your tax return. The exception is when you have a gain on the sale of your residence of greater than $250,000 (single) or $500,000 (married filing jointly). In this case you have to recognize any gain above $250,000 or $500,000 respectively, so you would have to keep track of all your receipts in order to increase your basis in your home when you sell.
- If you have to sell your home before you have lived in it for two years, you may still qualify for the exclusion. If you didn't meet the two year test because of a job-related move, health or other unforeseen circumstances, you may still qualify for a modified exclusion. The modified exclusion is calculated by taking the fraction of the two years that you lived in the home and multiplying that fraction by $250,000 (single) or $500,000 (married filing jointly). EXAMPLE: You are a single taxpayer who purchased a $300,000 home on July 1, 2014. On January 1, 2015, you move to another state as part of a job transfer. Your old home finally sells on March 15, 2015 for $350,000. You lived in your home for 6 months, so your modified exclusion is $62,500 (6 months/ 24 months X $250,000). Since the modified exclusion of $62,500 is greater than your actual gain of $50,000, your home sale is tax-free and there are no forms that you need to fill out on your tax return.
- If you have a rental property (or vacation home) that has significantly appreciated since you purchased it, you could move into the rental home and use it as your principal residence for two years, then sell it and have the exclusion apply. However, you would still have to recognize gain on any depreciation taken after May 6, 1997.
- If you are a first-time home buyer, you can have a penalty-free distribution of up to $10,000 from your Roth IRA or IRA to purchase your home. You can also take out $10,000 to help your child or grandchild buy their first home. The money needs to be used for acquiring, constructing, financing, or closing costs. Even though the 10% penalty does not apply, you still need to pay regular taxes on the distribution of a traditional IRA. You are also limited to using $10,000 in your lifetime.
- Convert non-deductible interest expense such as interest on credit cards and automobile loans into deductible home mortgage interest. You can deduct the interest on a home equity loan or line of credit on Schedule A of your 1040, and the interest on your home equity loan is deductible no matter how you used the loan money. One item to note is that if your home equity loan is over $100,000, the deductible interest expense is limited to the interest on the first $100,000 of your loan. CAUTION: Consider the loan fees and compare interest rates when deciding if it makes sense to convert non-deductible loans into deductible home equity loans.
- When you are constructing your home, you can deduct the interest expense on the construction loan from the time that construction begins. If construction lasts longer than 24 months, any mortgage interest after 24 months is not deductible. The interest is deductible again once you complete the home.
- Deduct the mortgage interest on your R.V., camper, or even your boat. You are allowed to deduct mortgage interest on your primary residence and one other residence. The definition of what constitutes a residence is very broad and includes R.V.s, campers, and boats as long as they have cooking, toilet, and sleeping facilities.
- Points or loan origination fees paid to acquire or improve your principal residence are fully deductible in the year paid. However, points paid to refinance your mortgage for a better interest rate, acquire a second residence, or to obtain a home equity loan are deductible over the life of the loan. So if you refinance your mortgage with a 15 year loan and pay $3,000 in points, you would deduct $200 a year in points on your Schedule A. If you sell your home or refinance again, you deduct the remaining points in the year the loan ends. Using the previous example, if you sell your home three years after you refinanced, you would have deducted $600 in points in previous years and you would deduct the remaining $2,400 in points the year the home sold.
- If you rent your home or vacation home for 14 days or less, you don't need to report your rental income or expenses on your tax return. However, if the home is an investment property that you do not live in during the year, then you would report rental income and expenses even if it is rented for 14 days or less.
- Home improvements for qualified medical reasons are deductible as medical expenses to the extent that the cost exceeds the increase in the value of your home from the improvement. Examples of home improvements for medical reasons are remodeling a bathroom to make it more accessible, installing an elevator, or constructing a swimming pool for arthritis treatment.
- There are two energy credits for homeowners. For full details about who qualifies and the restrictions, go to the IRS web site. The first credit gives you a tax credit on purchases buying qualified energy efficiency improvements for your existing home. The following items are potentially eligible: Insulation systems that reduce heat loss/gain, exterior windows (including skylights), exterior doors, certain metal roofs, advanced main air circulating fans, qualified natural gas, propane, or oil furnace or hot water heater. Other items of qualified energy efficient property can also qualify. The first credit has a lifetime maximum of $500 and no more than $200 of the credit can be attributable to expenses for windows.
The second credit is available to those who add qualified solar panels, solar water heating equipment, or a fuel cell power plant to their homes in the United States. Taxpayers are allowed one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system. No part of either system can be used to heat a pool or hot tub. Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each .5 kilowatt of capacity.
- You cannot deduct the loss on the sale of your home. There isn't a reporting requirement, so you don't need to report the sale of your home on your tax return. An exception to this rule is if the home is an investment property. If you are renting the home to someone else and are not using the home for personal purposes, then you would report the sale of your home on your tax return and deduct the loss.
- Most settlement fees and closing costs when you buy a house are not deductible, they are added to the cost basis of your home. However, real estate taxes and mortgage points found on your settlement statement are usually deductible on Schedule A. Mortgage interest shown on the settlement statement is usually already included in the Form 1098 you receive from your mortgage lender.