Given it is that dreaded time of year for many of us I figured I would ask my CPA to “break down” the ins & outs of the closing statement and general information on tax advantages of home ownership!
Tim Eisel has been my CPA for several years & has worked with several of my clients. Feel free to contact him if you are looking to hire a CPA to prepare your taxes. He is a family man & a local business which I love supporting. His contact info is firstname.lastname@example.org and direct 919 614 3213.
Here is what Tim had to say:
Tax benefits of home ownership
The American dream of owning a home has several benefits. A few significant federal tax benefits that may prove to be beneficial are listed below:
Home Mortgage Interest
One of the most important tax benefits of owning a home is the home mortgage interest deduction. Mortgage interest that is paid by the homeowner may be deductible. If you itemize deductions on your federal income tax return, you can generally deduct the interest that you pay on debt resulting from a loan used to buy, build, or improve your home, provided that the loan is secured by your home. Currently, interest paid on up to $1 million in mortgage debt may qualify for the interest deduction. If your mortgage loan exceeds $1 million, some of the interest that you pay on the loan may not be deductible.
Home Equity Loan Interest
The interest that you pay on a qualifying home equity loan or line of credit is generally deductible regardless of how you use the loan proceeds. Interest on home equity loans of less than $100,000 may be deductible as an itemized deduction on your federal tax return.
For 2012, qualified mortgage insurance premiums may be deductible, provided that the insurance is associated with home acquisition debt, and is being paid on an insurance contract issued after 2006. Home-owning families who itemize their deductions on their federal return and have not exceeded the income limits can qualify for the deduction.
Real Estate Taxes
If you itemize deductions on your federal tax return, real estate taxes that you have paid on your property are generally deductible.
Closing Costs/Settlement Fees
Whether you obtain a loan to purchase a home, or refinance an existing loan on your home, you’ll probably be charged closing costs. Closing costs may include points (also referred to as origination fees), appraisal fees, prepaid interest/taxes, legal fees, title search fees, and document preparation / processing fees. These costs are normally listed out in detail on the Good Faith Estimate. Some of these costs are deductible on your federal tax return if you itemize, and others may be added to the cost basis of your home.
Points, prepaid interest, and prepaid taxes may be eligible for deduction on your federal tax return in the year that you pay them if you itemize deductions and meet certain other requirements.
Other settlement fees/closing costs are generally not deductible on your tax return. Instead, you may adjust your tax basis in your home to reflect certain closing costs, such as: abstract fees, recording fees, legal fees, owner’s title insurance, and transfer or stamp taxes, to name a few.
Home Improvements and Repairs
Home improvements and repairs are generally nondeductible. However, improvements may be used to increase the tax basis of your home. Improvements add value to your home, prolong its life, or adapt it to a new use. A repair simply keeps your home in good operating condition. Regular repairs and maintenance are not considered improvements and are not included in the tax basis of your home.
Energy Tax Credit
If you make certain improvements to your home that improves your home’s energy efficiency, you may be eligible for a federal income tax credit.
Capital Gain Exclusion On Sale of Home
If you sell your principal residence at a gain, and meet all the requirements, you may be able to exclude some or all of the capital gain (up to $500,000 if you are married and file a joint return) from federal income tax. In general this exclusion can be used only once every two years. To qualify for the exclusion, you must have owned and used the home as your principal residence for a total of two out of the five years before the sale. If you sell your principal residence at a loss, you generally can’t deduct the loss on your tax return.
This information is intended to provide generalized guidance that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this information should not be acted upon without specific professional guidance.
Have a great week & as always if I can help you with anything real estate related give me a call!