Kelly Leighton

Last Updated: March 26, 2015 | View all posts by Kelly Leighton

With tax season in full bloom, are your clients familiar with the tax breaks they are eligible for simply for being a homeowner?

While not every homeowner will be eligible for each deduction, chances are there may be a few here they weren’t aware of, compliments of 1040Return.com.

As always, please remind your clients to check with their accountant before proceeding.

  • Points on home mortgage and refinancing. If your client bought a home in 2014 by availing mortgage, then apart from the mortgage interest, he can also write off the points on his tax return. ‘Points’ are the fees he paid to the lender for getting the loan. One point is equal to one percent of the principal loan amount. The fee varies from one point to three points depending on the trend prevalent in the area. Full deduction can be claimed for the points, provided they pertain to the purchase of the home.
  • Interest on home improvement loan. Interest on a home improvement loan is fully deductible if the improvement is made in the main home and it enhances its sale value.
  • Energy-Efficiency Tax Credit. This is a tax credit the IRS offers homeowners for making their home energy-efficient by installing equipment that will conserve energy while heating or cooling your home. Qualified storm doors, energy-efficient windows, insulation, air-conditioning and heating system, etc. are the things that can help save energy and earn tax credits at the same time. The lifetime limit of the home energy credit is $500, out of which only $200 can be used for the windows. This credit is set to expire on December 31, 2016.
  • Renewable energy tax credit. The Renewable Energy Efficiency Property Credit refers to the tax credit that homeowners get on installing the equipment that uses renewable sources of energy, such as the sun, wind and geothermal energy. Homeowners are eligible to gain this tax credit to the extent of 30 percent of the cost of the following equipment, installation included. The dollar limit on the amount of credit for fuel cell property is $500 per half-kilowatt of power capacity of the property. For example, if the fuel cell has a capacity of 10kW, it will qualify for $10,000 in tax credit. The amounts of credit for solar, wind and geothermal equipment do not have any upper limit. The credit is available for equipment placed in service through Dec. 31, 2016.
    • Qualified fuel cell property
    • Qualified solar electric systems
    • Qualified solar water heaters
    • Qualified small wind energy property
    • Qualified geothermal heat pumps.
  • Property taxes. The taxes paid to acquire the property are fully deductible from the taxable income and the same is reflected in the Form 1040. Transfer tax arising from the transfer of the property to the new owner is a very common item.
  • Redeemable ground rents. The redeemable grounds rents can be deducted if homeowners have been paying monthly or annual rentals.
  • Interest accrued on a reverse mortgage. The reverse mortgage is considered as a loan advance and not an income. Hence, the amount a homeowner receives is not taxable. Any interest, including the original issue discount, accrued on a reverse mortgage is not deductible until the loan is paid off.
  • Premium Mortgage Insurance. You may be eligible to claim the deduction for the Premium Mortgage Insurance (PMI) on your tax return. However, this deduction is set to expire with the tax year 2014.

Records of home expenses and improvements

  • Remind clients to keep track of the real estate taxes that they pay for their property, and to maintain good records by preserving the copy of the taxes paid.
  • The bank which financed the property will send a Form 1098, a statement showing the amount of interest paid on the mortgage. The 1098 has to be mailed by january 31 of the following year.
  • If a homeowner makes improvements to the property, he cannot write off the cost of home improvement. However, when the homeowner wishes to sell his home, the cost is supposed to be added to the purchase price of your property. The aim is to diminish the gain when selling the home.
  • Clients should retain the receipts every time an improvement to the property is made. It would be very easy to maintain and retrieve the receipts if stored in a dedicated file folder.

Tax Tips on selling and buying a home

  • Remind home sellers to retain a copy of the settlement agreement of when they had bought the home. If they do not buy a new home and decide to keep the cash, any gain that they might have made from the sale would be subject to tax, unless it does not exceed $250,000 for an individual and $500,000 for a married couple filing jointly.
  • First-time homebuyers would be glad to know that they can withdraw $10,000 from their IRA account to buy a home, without being charged any penalties.