At more than 70,000 pages long, it is little wonder that few people take advantage of all of the tax deductions and breaks that they qualify for. But if you are missing out on real estate tax breaks, you could be missing big. Before you meet with your accountant this tax season, be sure to research the following real estate and home improvement tax breaks.
Tax Breaks for Home Improvement and Real Estate
Green Home Improvement Tax Incentives
Investing in upgrades to increase your home’s energy efficiency will pay dividends in more ways than one. Not only will your utility bills be significantly less, but certain home improvements can significantly increase the value of your property and you may find that you feel much richer knowing that you are promoting a healthy environment. To reward your environmentalism (or frugality, as the case may be), the government also provides incentives for a variety of enhancements that either increase efficiency or make use of renewable energy. Even better, these tax credits cover a ton of home improvements that are usually on people’s honey-do lists, anyway. However, there are a lot of misconceptions about this particular tax credit. First, there is a lifetime limit for this tax credit of $500. If you have already cashed in, you will not qualify again. And while a new energy efficient stove or refrigerator can help you cut costs when it comes to the electric bill, those are not tax deductible. The following upgrades in an existing home will do the trick:
- $300 for a qualifying biomass stove
- $300 for qualifying air-source heat pumps
- $300 for qualifying central AC systems
- $150 for efficient hot water boilers
- $200 for qualifying furnaces and fans
- 10% of the cost of home insulation upgrades, excluding labor
- $300 on qualifying water heaters
- 10% of the cost of windows and skylights (up to $200)
- 10% of the cost of doors
- 10% of the cost of an energy-efficient roof, excluding labor
Check out IRS Form 5695 for more specifics.
On the flip side, you may also qualify for certain tax deductions for investments in energy generating improvements to your home. And that deduction is pretty darn generous at a whopping 30 percent of the costs for the following items:
- Solar panels
- Solar water heaters
- Fuel cells
- Wind turbines
- Geothermal heat pumps
Deducting Mortgage Interest
If you are already a homeowner, you likely qualify to deduct the interest you paid on your mortgage in 2016 (if you are not a homeowner, add this to the list of reasons you should consider buying a house in 2017). This deduction qualifies for any interest you pay on a mortgage to buy your home, a second mortgage, a line of credit secured by a main or second home, or a home equity loan. Want to find out if your loan qualifies? The IRS had the foresight to produce a handy flowchart. Or, for more specific information about this real estate tax break, go straight to the source and check out the IRS Publication 936: Home Mortgage Interest Deduction.
Rental Real Estate Tax Deductions
There is some good news for you this tax season if you make a portion of your income from rental properties. According to the IRS:
“You can deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance. You can deduct the costs of certain materials, supplies, repairs, and maintenance that you make to your rental property to keep your property in good operating condition.”
Sounds pretty broad, huh? If you are a landlord and want to know more about which types of items might qualify for real estate tax breaks, have a look at this list compiled by Nolo.
Sale of a Home
If you sold a home in 2016, you may be worried about paying income taxes on the profit you (hopefully) made. Unfortunately, you cannot deduct lost money resulting from the sale of a home. But if you owned and lived in the home for two years or more prior to the date of the sale of the home (main homes only, vacation homes or second homes do not count), you may be able to exclude up to $250,000 in profit from your reported income. Additionally, you can deduct expenses you may have incurred over the course of selling your home like commissions to a real estate agent, advertising fees or escrow costs. And if you sold your home because you had to move for work, be sure to find all of the receipts for your moving costs as well!
We are obviously real estate experts, not tax professionals. Be sure to do your homework before taking any of the above tax advice. We do, however, hope that this article has proven helpful. And if you are not a homeowner yet, maybe 2017 will be the year you take the big leap so that you will qualify for some awesome real estate tax breaks the next time around. For some help finding your next tax deduction, err, home, be sure to give us a call today!