The Top 10 Real Estate Tax Deductions for 2013

As the time to file income taxes approaches, it’s time to take a new look at the changing tax landscape for homeowners. The dynamic atmosphere in Washington, D.C. has a different effect each year on which tax breaks are proposed, rescinded, changed and extended for taxpayers who own a home.

Many of the tax benefits homeowners enjoy have been protected and extended through the 2013 tax season butthey will expire next year if Congress doesn’t act.

Disclaimer – This is only an informational summary of current tax issues in the news. If you need tax advice, please contact a tax attorney or CPA

1.  Mortgage Interest Deduction

Homeowners who itemize their deductions can deduct the interest paid on a mortgage with a balance of up to $1 million. While there is some movement to limit the total itemized deductions for taxpayers with higher incomes (more than $400,000), the current deductions hold for all tax brackets. Americans save around $100 million every year by deducting mortgage interest on their tax returns

2.  Home Improvement Loan Interest Deduction

The interest on home equity loans used for capital improvements to your home may be tax deductible. On loans with balances of up to $100,000, the interest is tax-deductible for a homeowner who uses the loan to make improvements such as adding square footage, upgrading the components of the home or repairing damage from a natural disaster. Maintenance tasks, like changing the carpet and painting a home, usually don’t count.

3.  Private Mortgage Insurance (PMI) Deduction

Homeowners who make a down payment of less than 20 percent are usually paying some sort of Private Mortgage Insurance. PMI (sometimes abbreviated as MIP or just MI) can be just a few to hundreds of dollars per month.

If your mortgage was originated after Jan 1, 2007, and you have PMI, it can be a tax deduction. The deduction is phased out, 10 percent per $1,000, for taxpayers who have an adjusted gross income between $100,000 and $109,000 and those above that level do not qualify. This deduction won’t be available next year unless Congress renews it for 2014.

4. Mortgage Points/Origination Deduction

Homeowners who paid points on their home purchase or refinance can often deduct those points on their tax returns. Points, also called origination fees, are usually percentage-based fees a lender charges to originate a loan. A 1 percent fee on a $100,000 loan would be one point, or $1,000.

On a home purchase loan, taxpayers can deduct the entirety of points paid in the same year. On a refinance loan, the points must be deducted as an amortization over the life of the loan. Many taxpayers forget about this amortized benefit over time, so it’s important to keep good records on the deduction of points on a refinance.

5. Energy Efficiency Upgrades/Repairs Deduction

Homeowners can deduct the cost of building materials used for energy efficiency upgrades to their home. This is actually a tax credit applied as a direct reduction of how much tax you owe, not just a reduction in your taxable income.

Ten percent of the total bill for energy-efficient materials can be used as a tax credit, up to a maximum $500 credit. Insulation, doors, new roofs, water heaters and other items qualify for the energy efficiency credit. There are individual limits for certain items, such as $150 for furnaces, $200 for windows and $300 for air conditioners and heat pumps.

6. Profit on Sale of Real Estate Deduction

If you’ve sold a home in the past year, you’re likely aware individuals can claim up to $250,000 of profit from the sale tax-free and married couples can claim up to $500,000 tax-free. The home must be a primary residence, meaning you must have lived in the home for two of the past five years. A homeowner could potentially claim this tax break on multiple homes within a fairly short time frame, but each tax-free sale must occur at least two years apart from the previous tax-free transaction.

Also new for 2013 isn’t a deduction, but a tax enacted by the Obama administration. Some individuals—those with an AGI more than $200,000—may be subject to a 3.8 percent tax on some income from interest, dividends, rents and capital gains.

7. Real Estate Selling Cost Deduction

For those lucky folks whose profits on the sale of their home might exceed the $250k/$500k limits, there are still some ways to reduce the tax burden. The costs of selling a home can be claimed as tax deductions.

By adding up all of the fees paid at closing, capital improvements made to the home while you owned it, money spent to make repairs to damaged property and marketing costs necessary to sell the home, you can add a significant figure to the cost basis of your home. This basically raises the original price you paid for the home. Your cost basis begins with the original price of the home, and then adds in the improvement and selling costs.  When the new cost basis price is compared to your selling price, it reduces your potentially taxable profit on the home.

8. Home Office Deduction

Starting for the 2013 tax year, tax filers who work at home can use the IRS’ new simplified option for deducting home office expenses. With this form, you can get a $5 deduction for each sq. foot used as an office, with a maximum of 300 sq. feet. The office must be the primary office location where you get the majority of your work done, and it needs to be used exclusively for business (it can’t be in your bedroom). You should be realistic with its size and use—start stretching the truth and you could increase your risk of being audited.

9. Property Tax Deduction

While it may sound strange to have a tax-deductible tax, the overall effect is that you don’t pay income tax on money that was spent on property taxes.

Homeowners should only deduct the amount of property tax actually paid to their local municipality for the year. This is not necessarily the amount you paid to your escrow account, and should not include any other city or county fees that might potentially be on the same bill as your property taxes.

10. Loan Forgiveness Deduction

The Mortgage Debt Forgiveness Relief Act of 2007 made forgiven debt on some mortgages not taxable. For example, a homeowner makes a short sale of their primary home at $100,000, but they owe $150,000 on their mortgage. The lender forgives the extra $50,000 owed, but the government views it as $50,000 in taxable income as a gift from the lender to the borrower. The Mortgage Debt Forgiveness Act temporarily relieved the taxpayer of that burden, up to $2 million, or $1 million if filing separately. The act applies to primary home sales made from 2007 through 2013, but it will expire next year if Congress doesn’t act. 

IRS-suggested disclaimer: To the extent that this message or any attachment concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  This message was written to support the promotion or marketing of the transactions or matters addressed herein, and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.