How to Do Your Taxes if You’re a Homeowner
Hey there, homeowner! We’re happy you’ve got a slice of the American dream, and you’ll get the tax breaks that go along with it. In fact, some of these tax incentives apply to even a second home. Ooh la la!
Whether you bought, sold or just happily lived in your home this year, we’ll walk you through all the tax stuff you need to know.
Just skim the “If you …” headers to find the sections that affect you.
The Nuts and Bolts
If You Paid Interest on Your Mortgage …
You should have received a form 1098 from your lender, which will tell you how much mortgage interest you paid. You can deduct 100% of your mortgage interest and property taxes, as long as your loan is less than $1 million, ($500,000 if you are married and filing separately). If it’s over that, the IRS will limit your deduction. But here’s the catch: You have to itemize in order to claim the deduction. This is a choice that takes a little math and thought. But basically, you calculate your total itemized deduction, compare it against the standard deduction and then take the higher deduction.
You can also deduct late payment charges (please don’t consider this an incentive to pay late) and pre-payment penalties.
If You Paid Property Tax … (Hint: You Did)
The property tax you pay each year is deductible. Usually these property taxes are paid as part of your monthly loan payments, so you can find that information on the annual statement from your lender. Real estate taxes can be deducted on federal returns even though they may not be deductible in the state where the property is situated.
If You Had a Loan Forgiven …
Depending on the time of debt, if a lender canceled it, you could be taxed as though that canceled debt were income. For example, if you had a mortgage of $10,000, paid $2,000 and the bank canceled the rest, you would be taxed as though you had $8,000 of income.
However, thanks to the Mortgage Debt Forgiveness Relief Act of 2007, the IRS will not charge income tax on a canceled debt. That means if you got a loan modification, short sale or foreclosure on your primary residence, you won’t be hit with a tax bill for it. This applies to up to $2 million in debt ($1 million if you are married, filing separately), that you took on to:
- Buy your primary home
- Improve your primary home
- Refinance the loan for your primary home
This was only in effect through tax year 2012.
If You Made Energy-Efficiency Improvements to Your Home …
The Nonbusiness Energy Property Credit is for homeowners who made energy-efficient improvements such as installing insulation, new windows or furnaces. For 2012, you can get a credit worth 10% of the cost of the qualified efficiency improvements you made. You can claim up to $500 over your lifetime.
What if your electricity comes from your own green sources? You should check out the Residential Energy Efficient Property Credit. This credit gives homeowners 30% of what they spend on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines and fuel cell property. No cap exists on the amount of credit, except for fuel cell property.
If in this coming year you decide you want to go green for your home, the IRS suggests that you check for a certification statement that the item is eligible for a tax credit before you purchase. This can normally be found on the packaging or the company’s website. Full details are available on Form 5695.
If Your Home Was Damaged in a Disaster …
If your home was damaged by a disaster like a tornado or fire, you might be able deduct the amount that wasn’t reimbursed by insurance. To do so, you need to know your AGI. Then multiply that by 10%, and subtract that and $100 from the amount of damage not reimbursed.