It’s been a tough few years for homeowners, but sometimes relief comes in the least expected form, such as on your tax return. Keep in mind that while claiming tax credits and deductions can save you money, they can also complicate your tax filing, since you’ll need to itemize your return. That said, read on to find out which of these tax breaks you can claim, and help your dream home start to pay off.
First Time Homebuyer Credit
The First-Time Homebuyer Credit expired during 2010, but if you are a first-time homebuyer who purchased a primary residence by April 30, 2010 that closed before September 30, 2010, you can still qualify for a tax credit. The credit even extends to those who bought their first home in 2008. To be eligible for this credit of up to $8,000, individuals must not have owned a residence in the United States in the previous three years and must earn between $125,000 and $145,000. The home cannot cost more than $800,000, and must be your primary residence. The credit is also refundable: if it more than offsets your tax liability, you’ll get a refund check. Now that’s a good housewarming gift!
Mortgage Interest Deduction
Mortgage interest tax deductions allow millions of American homeowners to write off billions of dollars of mortgage interest each year on their tax returns. Mortgage interest amounts are typically high enough to qualify you to itemize on your tax return. Loans up to $1 million ($500,000 if you’re a single filer) are eligible for deduction. You can use the information found on Form 1098 (provided by your mortgage lender) to fill out the Schedule A of your 1040 long form.
If you refinanced your home or opened a home equity line of credit, you may be able to deduct those expenses as well. Some equity debts are deductible up to $100,000, but if you have a remaining amount on your first mortgage, that could limit your tax break.
Those who fell behind on mortgage payments and lost their home to foreclosure can use the Mortgage Forgiveness Act to reduce their payments. Under the act, which extends through 2012, debt on your principal residence that is forgiven or canceled by a lender is not included in your taxable income. Normally, if a money lender cancels or forgives your debt, the forgiven amount is listed in your income (because you no longer have to repay it) and is taxed. With mortgage forgiveness, when the lender cancels the remaining amount of a loan or mortgage, you won’t be taxed on that remainder.
Cancellation of taxable income applies to debt reduced through mortgage restructuring, as well as mortgage debt forgiven through a foreclosure, and qualifies for relief of up to $2 million ($1 million if filing separately).
Tax-Free Capital Gains
When you invest in an asset like a bond or real estate, and sell it for a higher amount than the original purchase price, that profit is called a capital gain. Typically, capital gains are taxed, but in the case of residential real estate, qualified homeowners can reap the first $250,000 of capital gain on the sale of their homes tax-free, and married couples filing jointly can claim $500,000.
Credits for Energy-Saving Home Improvements
If you spent money on energy-saving home improvements last year, you’re in luck: not only will your efforts save you money down the road, they may get you a tax credit in 2011. The tax credit reimburses you 30% of your costs, up to a combined maximum of $1,500 in both 2009 and 2010. It applies to qualified insulation, windows, outside doors, biomass fuel stoves and high-efficiency furnaces, water heaters and central air conditioners.
This is an overview of the tax law changes that affect homeowners in the 2011 filing season. We’ll be covering more specific areas of tax law changes in future posts, so stay tuned. For more info, check out Rocket Lawyer’s Free Legal Help Personal Tax Articles.