Tax Deduction Tips for Home Buyers
Buying a home is a huge step, and there is a lot of information to take in along the way, such as appraisers, inspections, mortgages, contracts, addendums and more. It can be a little overwhelming in fact. One thing you definitely need to be aware of is the impact that a new home will have on your taxes. If you are moving to Knoxville and buying a home, here are some things that you need to know. The interest you pay on your home is the largest deduction you’ll get for owning it, so it is good to be informed.
Unlike rental property purchases, you cannot deduct the purchase price of your personal residence in any way whatsoever. The IRS considers personal residences to be personal property and not a business expense. Nor can you deduct the cost of repairs, maintenance or renovations on your personal residence.
But let’s talk about what you can deduct!
Interest payments on home mortgages up to $1 million ($500,000 if married and filing separately)
Any points paid at closing in lieu of interest, reporting the payment on IRS Form 1098 – Mortgage Interest Statement
Interest on home improvement or home equity loans with principal of up to $100,000, provided that the debt is also secured by a lien
Property taxes attributable to the date of sale and after. The seller shall pay property taxes attributable for the year up to the date of sale. Therefore you may not deduct them.
Any penalties for prepayment of mortgages, as well as fees for late payments, provided the fees are not connected with any specific service
Interest payments, deductible points, sales and property taxes should be deducted by preparing an IRS Form 1040, Individual Tax Return, and a Schedule A, Miscellaneous Itemized Deductions
While personal residences don’t qualify for many of the same tax breaks that investment properties qualify for, there is at least one powerful tax advantage to owning your personal home: the capital gains tax exemption. Normally, you have to pay capital gains taxes of between 5 and 15 percent on property you have held for over a year. However, the IRS exempts the first $250,000 of profit on the sale of a qualified personal residence. Married taxpayers can exempt up to $500,000 of profit from capital gains taxes. Special rules apply to active duty military personnel.