Easy-to-Miss Homeowner Tax Savings*
The Mortgage Insurance Premium Deduction
(Yes, It's Back)
In early 2012 the big news was that the deduction for mortgage insurance premiums had become a thing of the past. Many people are not aware that as part of the fiscal cliff agreement it was reinstated not only for 2013, but retroactively for 2012 as well.
This applies to private mortgage insurance (PMI), as well as mortgage insurance provided by the VA, FHA, and Rural Housing Service.
There are a few restrictions on claiming the deduction and it starts phasing out at certain income levels, so check the Mortgage Insurance Premiums section of IRS Publication 936 for details.
Mortgage Interest on a Second Home
You might be aware that you can deduct mortgage interest on a second home in addition to your primary residence, but did you know that the definition of "second home" is extremely broad, to say the least?
According to the IRS, a qualified home "includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities."
(In other words, a boat or the RV that tows it around might qualify.)
Non-Rental Second Home: You do not even have to use your second home during the tax year as long as you do not hold it out for rent or resale to others.
Second Home Rented Out: If you rent out your second home, the IRS states that "you must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer" in order for it to qualify for the second home mortgage interest deduction.
There are restrictions, not surprisingly, so see the Qualified Home section of Publication 936 for more information.
Medically Required Home Improvements
You can deduct part of the cost of home improvements if their main purpose is medical care for you, your spouse, or your dependent. However, there are some pretty tight guidelines:
- You can deduct only the amount that is greater than 7.5 percent of your adjusted gross income in 2012. (This increases to 10 percent for many people in 2013.)
- If the improvement increases the value of your home, the medical expense is the cost of the improvement minus the amount of increase in home value.
The cost of maintaining and operating a capital improvement, such as an elevator, can also count as a medical expense as long as the improvement's main purpose is medical care.
See the Capital Expenses section of Publication 502 to check other guidelines of this tax deduction, and note the list of improvements that, according to the IRS, do not add to home value. This means their entire cost can be counted as a medical expense.
Points Paid on a Home Loan
The IRS allows you to deduct certain charges paid in connection with various home loans, including refinances and home equity loans. These costs are typically referred to as "loan origination fees, maximum loan charges, loan discount, or discount points."
The big question is usually, "Can I deduct the entire amount in the year I paid it, or does it get deducted over the life of the loan?"
This depends on your answers to the nine questions in the Points section of Publication 936. The IRS also has a really handy "yes or no" flowchart that you can use to get an idea; click here or on the image below to see it.
Did You Know?
- Seller-paid points can be used as a tax deduction by the buyer.
- An origination fee needs to be listed as a percentage of the principal loan amount rather than as a flat fee on your HUD-1 Settlement Statement in order to qualify as a cost that you can deduct entirely in the year you paid it.
Rental Property Expenses
This is a huge area of consideration for landlords; suffice to say that some important tax rules have changed recently. Here's a link to an interesting article from the legal site Nolo.com, explaining how the definitions of "repair" and "improvement" will be different in January of 2014, and how that could affect the owners of rental property.
* The Bottom Line...
Nothing beats an expert opinion when you're dealing with issues that could save (or cost) you many thousands of dollars. The notes above are not expert financial or legal advice, but are meant to keep you informed of issues that you could investigate further with a qualified tax professional if you wish.
Are you planning to buy or sell a home, or do you know someone who is? Please call or email me - I'm never too busy to help you and the people you care about with real estate.
(What the lawyers make us say: The information in this newsletter is deemed reliable but not guaranteed. Please always consult a qualified expert before making decisions based on this content. Nothing in this article is meant to be taken as expert legal, financial, or medical advice.)