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Mortgage Loan Interest: The Mother Of All Tax Breaks, because
interest payments comprises a large portion of your mortgage payment in the
early years of the loan's term, mortgage interest on a maximum of $1 million in
mortgage debt secured by a first and second home is deductible. Deductions
reduce your taxable income against which your taxes due are calculated. The $1
million level applies to joint tax filers. You get half the deduction if you
file single or separately.
Likewise, home equity loan interest is deductible, but limited to the smaller
of $100,000 (half as much for each member of a married couple if they file
separately), or the total of your home's fair market value as determined by a
complicated formula you may need a tax professional's help to decipher.
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Home Improvement Loan Interest: The interest on a home improvement
loan is also deductible, but calculated differently. You can deduct all the
interest on a home improvement loan provided the work is a "capital improvement"
rather than repairs, maintenance or cosmetic upgrades. Capital improvements
typically increase your home's value (say, because you added a room), prolong
it's life (a new roof) or adapt it to new uses (universal design improvements to
assist older people or people with disabilities). You get tax benefits from
repair work (painting, repairing, etc.) only when you sell your home but you can
use a home equity loan to make repairs and deduct the interest -- up to the
limits.
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Points: Points, each equal to 1 percent of the loan principal, are
charged by lenders as part of the cost of the loan. You can fully deduct points
associated with a home purchase mortgage, but not a mortgage broker's
commission. Refinanced mortgage points are deductible too, but only when they
are amortized over the life of the loan. Once you refinance a second time, the
balance of the old points from a refinanced loan offer an immediate write off,
as you begin to amortize the new points.
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Property Taxes: Property taxes or real estate taxes are fully
deductible. Any local city or state property tax refunds reduces your federal
property tax deduction by the same amount.
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Capital Gains Exclusion: Home buying investors' best tax shelter
comes from provisions in the
Taxpayer Relief Act of 1997 which allows married taxpayers who
file jointly to keep, tax free, up to $500,000 in profit on the sale of a home
used as a principal residence for two of the prior five years. The amount is
halved for those filing single or separately. You can use the benefit as often
as you qualify.
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Home-Based Business Deduction: Home offices that use a portion of
your home exclusively for business could qualify you to deduct a percentage of
costs related to that portion. Included are a percentage of your insurance and
repair costs, utility bills and depreciation. Under clarified provisions of the
Taxpayer Relief Act of 1997, if your home office qualifies, you don't have to
allocate a home sale's capital gains between the home and the business. Previously if you used, say, 10 percent of your home for a home-based
business, 10 percent of the gain from a sale would be subject to capital gain
taxes and you couldn't use the capital gains tax exclusion on that portion. The
clarified provision does not excuse you from a recapture tax if you've taken a
depreciation deduction because of the home-based business.
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Selling Costs and Capital Improvements: When you sell your home, you
can reduce your taxable capital gain by the amount of your selling costs, which
include real estate commissions, title insurance, legal fees, advertising and
inspection fees. Cost typically stemming from decorating or repairs -- painting,
wallpapering, planting flowers, maintenance, and the like -- are also selling
costs if you complete them within 90 days of your sale and with the intention of
making the home more saleable.
Selling costs are deducted from your gain. Gain is your home's selling price,
minus deductible closing costs, minus selling costs, minus your tax basis in the
property. Your basis is the original purchase price, plus the cost of capital
improvements, minus any depreciation.
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Moving Costs: A move triggered by a new job comes with some
deductible moving costs. To qualify, you must meet certain requirements
including, moving within one year of starting your new job, moving 50 miles
farther from your old home than your old job was and working full-time at the
new job for 39 of 52 weeks following the move. Deductions include travel or
transportation costs and expenses for lodging and storing your household goods.
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Mortgage Tax Credit: Mortgage Credit Certificates (MCCs) allow
qualifying low-income, first-time home buyers to take a mortgage interest tax
credit of up to 20 percent (the amount varies by jurisdiction) of the mortgage
interest payments made on a home. This credit is available every year you keep
the loan and live in the house purchased with the certificate. Unlike a
deduction that reduces your income, the credit is subtracted, dollar for dollar,
from the income tax owed. For example, with a 20 percent tax credit, if you paid
$10,000 in interest, your tax credit would be $2,000. If you owe $2,000 in
income taxes without the credit, you would end up owing nothing to the IRS after
the credit was applied. The remaining 80 percent of your mortgage interest --
$8,000 -- is taken as a normal mortgage interest deduction.
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Energy Tax Credits: The newest home-based tax credits were made
possible last year by the Energy Policy Act of 2005. Tax credits of up to $500
in 2006 and 2007 are available for upgrading heating and air conditioning
systems, insulations, windows, doors and thermostats, caulking leaks, installing
pigmented metal roofs and for otherwise putting the bite on energy waste in your
home. Qualified solar energy and fuel cell systems can net tax credits of up to
$2,000. Some states also offer tax credits or rebate deals that could reduce the
federal credit. Related tax credits are available for consumers who buy
alternative- and clean-fuel burning cars and for entrepreneurial consumers who
install clean-fuel vehicle refueling property at the principal residence of the
taxpayer.