WADDY

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Catonsville, Maryland 21244
Phone: (410) 298-0300

Summer Starts Home-Buying Season

July 29, 2015adminBlog0

Easy, breezy days aren’t the only thing for which summer is known. With the start of summer comes the start of the home-buying season. If you’re in the real estate market, there’s no shortage of paperwork and details in the buying process, but don’t overlook the positive impact buying a house will have on your overall tax picture. It’s more than “home sweet home.” Home ownership brings a number of tax benefits and is very likely your largest deduction.
As a homeowner, there are quite a number of deductions you can take when you itemize on your tax return, and these deductions are typically substantial. They include:

  • Mortgage interest: If you itemize, you can deduct the interest you pay on your mortgage. According to Tax Policy Center, the average savings on income tax for this deduction for a homeowner is between $1,500.00 and $2,000.00. The limit for this deduction is interest paid on up to $1 million of debt for the purchase of a home. Additionally, you can also deduct the interest paid on up to $100,000 of home equity debt, as long as the funds were used to buy, build, or improve the property.
  • Taxes: You may also deduct the taxes you pay on the property levied by local and state governments. Most property taxes are assessed locally to fund schools and other services provided at the local level, but some states also have property tax.
  • Points and PMI/MIP: You may also deduct any points paid at closing as well as PMI/MIP (Private Mortgage Insurance/Mortgage Insurance Premium).

Another great benefit of home ownership is the potential for tax-free investing. When you sell, the capital gain may be excluded (at least in part) from your taxable income. The maximum exclusion is $250,000 ($500,000 for joint filers) as long as certain criteria are met: The home must have been your principal residence for two of the five years preceding the sale and you may not have claimed the capital gain exclusion from another property sale in the previous two years.
Be certain to keep copies of your settlement statement(s) for your tax records.

Rental Property Benefits
Rental properties carry tax deductions as well. To start, you may also deduct mortgage interest, taxes, points and PMI/MIP as you can on a property that is your primary residence. Additionally you can deduct the following expenses on a rental property:

  • Homeowner’s/Hazard insurance
  • Utilities that you pay
  • Repairs
  • Home warranty
  • Depreciation
  • Any other property-related expenses

Home Improvements
As a homeowner, you will likely make improvements to your home and property over the course of ownership. These improvements may include renovations (think bathroom or kitchen upgrades), additions, window or door replacements, roof replacements, adding amenities like pools or hot tubs… and the list goes on.
These improvements are not deductible, but they will very likely increase the value of your property and benefit you when it’s time to sell. Be certain to keep receipts and documentation of improvements as you can subtract the cost of these against any capital gain on the sale. This is especially important if your gain is nearing the threshold for the capital gain exclusion.
Some improvements that create energy savings (e.g. geothermal heat pump or solar water heating) may qualify for an energy credit on your current taxes. The regulations for residential energy credits may change, so be certain to keep receipts, so you can claim this credit as long as it is renewed. Learn more aboutResidential Energy Credits.

Refinancing

If you already own a home you may want to look at refinancing for various reasons.  Here are a couple of reasons why you might decide to refinance:

  • You may have an older interest rate that is higher than the current average.
  • You may want to get out of an adjustable-rate mortgage.
  • You may have a FHA loan that closed prior to January 2015 and you are paying the old MIP premiums rate.
  • You may also want to consolidate debt if you have a home equity loan in addition to your original mortgage.

In order to determine if refinancing makes fiscal sense, you need to determine the closing costs associated with the refinance and how long it will take for your realized monthly cost savings to offset those closing fees. If you plan to stay in your home for a while, it typically works out in your favor; however, if not, you could easily lose money on refinancing.  We can run some scenarios to help you determine if you should refinance. Contact usfor an appointment.

Cancelling PMI
You might be able to save on your monthly mortgage payment without refinancing. According to Consumer Financial Protection Bureau, your private mortgage insurance (PMI) can be cancelled when you have reached the date when the principal balance of your mortgage is scheduled to fall below 80 percent of the original value of your home. This date should be included on a PMI disclosure form issued with your original mortgage.
There are other criteria involved with PMI cancellation including good payment history and being current with your payment, certification of no additional liens, and property appraisal.

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