Tax Benefits

Tax benefits of home ownership:

Most homeowners are aware that mortgage interest and real estate taxes are deductible. To claim these, as well as others discussed here, you must itemize on Schedule A, form 1040 (and under IRS rules, if you itemize you are not entitled to the standard deduction). If you purchased or sold a home in 2005 here are some guidelines for you to become familiar with.

You should have received a statement from your lender by the end of January indicating the interest you paid during the year. If your home loan is with a private party you may still deduct the interest as long as the loan is secured by your home. You can deduct a late payment or pre-payment charge as long as the charge was not for a specific service received in connection with your mortgage. You may also deduct any points you paid, except in refinances or second homes, if you meet certain requirements. Real estate taxes, typically made by your lender from the escrow account, are entirely deductible.

Save receipts and records for all improvements you make to your home. You cannot deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home. This serves to reduce any potential taxable gain that you may have from the sale of your home. Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if have lived in the home as your principal residence for two out of the last five years.

The following are not deductible: homeowner’s, fire, title or mortgage insurance premiums; principal mortgage payments, settlement costs or HOA dues.

Take a copy of your closing statement and any other expenses that might apply to an experienced accountant so they can help separate deductions from costs and eliminate non-deductible items.