The 6 Need-to-Know Tax Breaks for Homeowners

January has come (and nearly gone!), bringing with it the promise of a new year filled with new beginnings–including the start of tax season. And while owning a home is a great investment, the taxes that come with home ownership can also bring a lot of uncertainty and confusion.

David Bakke, a contributor of Money Crashers, one of the top personal finance blogs, recently offered his take via Zillow on the 6 need-to-know tax breaks for homeowners.

According to Bakke, “In most cases, you need to itemize your taxes in order to take advantage of all the tax breaks that accompany home ownership. This might seem overwhelming, but the benefits of completing this process make up for the inconvenience.”

1. Mortgage Interest Deduction

Mortgage Interest Deduction (MID) is one of the top tax breaks for homeowners, potentially saving you a significant amount of money. Bakke explains: “In the beginning, the majority of your monthly mortgage payments go toward loan interest, and you can deduct all the interest from your mortgage on your taxes. Keep Form 1098, issued by your lender, with your important records. This form explains exactly how much you can deduct and serves as proof if you are audited by the IRS.”

2. Mortgage Insurance Premiums

For homeowners with new mortgages, if your loan-to-value ratio is higher than 80%, you most likely carry some form of private mortgage insurance (PMI).  Typically, “Once you reach 20% equity in your home, you can avoid paying private mortgage insurance.”

According to Bakke, “Until you reach that level of equity, if your adjusted gross income (AGI) is less than $100,000 (or $50,000, if married filing separately), you may be able to deduct the amount that you paid. If you surpass that income level, the deduction is either reduced or eliminated. If your AGI is $109,000 ($54,500, if married filing separately) then the deduction goes away altogether.”

3. Energy Star

The energy-efficient fixtures or appliances you installed can help save money on top of the savings you score with your monthly utilities bills.  If you install energy-efficient windows, doors, and skylights in your primary residence before the end of the year, you could be eligible for another tax deduction. In order to take advantage of this tax break, you must install the items by the end of the year.

Assuming your installations meet the necessary criteria, including the Energy Star program requirements, “You can receive a tax credit equal to 10% of the cost of the products. The credit for windows and skylights is capped at $200, the limit for doors is $500, and you cannot deduct installation costs. The IRS does not state what documentation you need to prove that you paid for these costs. However, you should hold on to all receipts and Energy Star labels for any qualified improvements you make on your home. There are quite a few green energy tax deductions for home improvement.”

4. Points

Points, the fees charged to the borrower when obtaining a home loan, may also offer a tax break to homeowners.  According to Bakke, “If you have your first mortgage, you can deduct these charges in the year that you paid them if the loan is for your primary residence and you didn’t pay excessive points. If you have refinanced your mortgage, you can deduct points over the life of the loan.”

5. Property Taxes

You can also deduct state and local property taxes, “As long as they are based on the assessed value of the real property. If you pay your property taxes out-of-pocket, you need to locate your bills to determine how much you paid. Most homeowners pay through an escrow account; if you do the same, the information also appears on Form 1098.”

6. Construction Loan Interest

Did you take out a construction loan to build your home?  You might qualify to be able to deduct the interest. However, this  deduction is only usable during the first 24 months of the loan, even when the actual construction takes longer.

The Bottom Line

Staying organized and keeping impeccable records will help you TREMENDOUSLY, allowing you to take advantage of every tax break, deduction, and credit at your disposal. However, you may want to seriously consider consulting a tax professional, especially if you are preparing your taxes for the first time after you buy your home.

As Bakke points out,  “You will likely encounter various technical restrictions and confusing guidelines, and you certainly don’t want any problems with the IRS. A professional can help you find more tax breaks, and you will get the best return on investment when you understand and take advantage of each and every one.”

Which tax breaks are you taking advantage of as a homeowners?

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The Appraisal Came in Low — Now What?

Listen up sellers: If you feel the appraisal on your home is too low, there are some steps you can take to resolve the issue. From HouseLogic.com, here are 5 strategies you can use if the appraisal comes in short.

OK to Flip that House, says FHA

CNN is reporting that the Federal Housing Administration has some good news for real estate flippers–the investors who buy homes on the cheap so that they can quickly resell in order to turn a profit.

The news report said this of FHA: “In an effort to help stabilize housing prices and unload some of the foreclosures that are flooding low-income communities, the mortgage insurer extended a waiver of its anti-flipping regulations through 2012.”

The waiver, which was issued in 2010 and expired at the end of December, suspended regulations that prohibited the agency from insuring mortgages used for purchasing homes that are bought and resold in less than 90 days.

Acting FHA Commissioner Carol Galante explained: “This extension is intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight.”

The ban was first initiated as a preventative measure against predatory flipping, in which homes when homes are quickly resold at inflated prices to unsuspecting buyers.  However, the extension of this waiver through 2012 may offer help to many low-income communities that continue to struggle.

Foreclosures have been especially problematic in many low-income neighborhoods, causing declining property values and surges in crime and other “social ills.” In such neighborhoods, “Real estate flippers often rehab these damaged homes before reselling them, improving conditions for neighborhoods.”  FHA mortgage insurance plays a crucial role for many low-income communities.  In fact, many of the loans in these communities could not be issued without FHA backing.

CNN reports that in order to qualify for the waiver, certain conditions must be met:
  • The transaction must be “arms length” with no other relationship between seller and buyer.
  • If the new sale price is 20% or more above the previous selling price, the lender has to document and justify the increase and meet other conditions, such as making sure the home has been inspected.

The report states that, “Since the waiver went into effect in February of 2010, the FHA has insured more than 42,000 loans to purchase homes that were being resold within 90 days. These totaled more than $7 billion in mortgage principal.”

Ways Sellers Can Compete with Foreclosures

The number of home purchases involving foreclosed properties or short sales is more significant now than ever before.  However, for many would-be sellers, the idea of competing with the ridiculously low-priced house down the street somehow doesn’t sound all that encouraging.  MSN recently offered some advice to the non-distressed, above-water sellers on ways that they can compete with foreclosures.

1. Sell sooner rather than later.

We’re not suggesting that you should sell ASAP if you’re unsure about it, or if you really don’t have to.  But if you are planning on selling soon, or if you need to sell, now is the time to make your move.

“Sure, the slowdown in foreclosure activity could mean less competition now. But you should account for a boomerang effect: The number of foreclosures is expected to skyrocket later this year.”

2. Get your story out

In many parts of the country, foreclosure purchases and short sales comprise 20% to more than half of all home sales.

“If you are a long-term homeowner who has kept up on your mortgage payments, you must deliver that message. This is your key advantage over a lower-priced foreclosure, especially in light of the robo-signing mess. Buyers will know from whom they are buying the home —no title issues here. You can get this point out tactfully in your ads with phrases such as ‘long-term ownership’ and ‘been in the family for decades.'”

3. Do your homework.

Informed buyers (read: serious buyers) will come prepared with a list of comparable properties which will include any active listings or sales (standard, foreclosure, and short sales alike) in your neighborhood.  Sellers may want to, “Provide your own market analysis, which can help highlight the challenges facing foreclosed properties.”

Your market analysis, according to MSN, should include two parts: “The first report should be of comparable homes sold in the past few months, with foreclosures broken out separately…The second should detail homes on the market now. This will help you frame the decision on favorable terms: Buyers should consider homes like yours instead of foreclosures.”

4. Price aggressively without undercutting foreclosures.

Listen up: “The aim is to sell your home, maybe with a small gain. Forget about making a killing. Few homeowners who are current on their mortgage can match a foreclosure price.

However, buyers are still looking for a good deal.  MSN advises sellers to, “Look at what other nondistressed properties are selling for in your neighborhood and set your price below them. Drive home the point that the price is the price — with foreclosures, a bank can take a better offer until the day of the closing.”

5. Burst those foreclosure fantasies.

Most buyers are not completely aware of what it takes to buy a foreclosed home. Frequently, “Individual buyers don’t stand a chance because they compete with investors who are ready to pay cash. If buyers or agents don’t know this, enlighten them. There is a significant percentage of buyers (who) could not buy a foreclosure if they wanted to.”