The added value, or extra tax breaks from owning your home

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When it comes to homebuying, or owning a home, you’re used to hearing that the interest on your loan is tax deductible. But there are many more possibilities for tax breaks related to

owning your home in the United States. Because you may be in the process of buying your first home, or you have bought a home for the first time in the United States, some of the terms mentioned here may be new to you. To that end, here’s a handy Dictionary of real estate purchase and lending terms that I wrote a while back. Keep it handy, and let’s see if I can help you save some money on taxes next year!

State tax
It may seem unimportant but if you own a $500,000 home in Maryland, that’s a $5,500 property tax that you can deduct on next year’s return.

Points!
If you close on a home loan this year, keep in mind that both origination and rate discount points are deductible; that’s because the IRS considers them interest paid on a loan which, as I mentioned at the start of this post, everyone knows you can deduct on your tax return. Some are deductible all at once, as happens with the purchase of a first home, or on a loan to build your first home. Others are deductible over the life of your loan. The best way to figure out how to deduct the points on your loan(s) is to visit the IRS’s webpage on home owner deductions.

IRA withdrawal for down payment
If you are a first/time homebuyer, you can withdraw up to $10,000 penalty-free from your

IRA account if you use it as a down payment. Spouses, children and parents can help by doing the same. This is not a tax deduction, but it is penalty free and that is a tax break on its own.

Note: keep in mind that I stated that the IRA withdrawals for home buying are penalty-free. The money you withdraw is still taxable income that you will have to include in next year’s tax return.

PMI and FHA mortgage insurance premiums
Private mortgage insurance, a lender-mandated insurance for homebuyers who lack or are short on their down payments, can be deducted on a tax return, as long as their income is below a certain limit. FHA mortgage insurance premiums may also be deducted. Ask your tax preparer or check the IRS Home Mortgage Interest Deduction instructions to see what qualifies (IRS tax forms are actually understandable if we sit down and follow the instructions).

Home repairs
Home repairs are often a necessary evil. Others, we just like to make our home into a place that is more suited to our tastes, or nicer to live in. Whatever the reason, there are two tax savings related to home improvements:

A wind tree.

• If you take a home improvement loan of less than $100,000, the interest on that loan will be deductible on your future tax returns; and
• While the cost of the repairs is not tax deductible, it is deductible from capital gains the day you choose to sell the home, and that will save you on that year’s tax return. 

And speaking of home improvements, let’s talk about how you can save even more on those.

Energy efficiency credits
I am sad to report that the $500 tax credit for the purchase of energy efficient equipment (like energy-saving windows, storm windows and doors, insulation) expired at the end of 2016 and has not been renewed.

Nonetheless, there’s a much greater Renewable Energy Efficiency Property Credit that can save you a lot on your next tax return. If you install renewable energy-consuming equipment, you can get a tax credit of up to 30% of the cost, including the cost of installation. Solar panels, solar heaters, fuel cells, small wind energy equipment and

geothermal pumps all qualify. Clean energy that saves you money, helps the planet, and provides tax credits? Bliss!

And last, but not least…

Damage losses
Sometimes bad things can happen to our home: flooding, vandalism, fire, storm damage; these things happen and insurance doesn’t always cover us for everything we lost. If this is the case, and you end up paying a lot to replace lost items or destroyed property, if insurance deductible that you’re asked to pay exceeds 10% of your Adjusted Gross Income (see box to the left), or the repairs that you’ve had to make on your own exceed that amount, keep documentation and receipts for all of it, as you will receive a tax break for it.