Deductions: Q&A for Homeowners
Q: What are the most obvious tax breaks that homeowners are
eligible for?
A: Deductions for property taxes and home mortgage interest can benefit
homeowners who itemize deductions on their tax return.
Q: What are the not-so-obvious or often overlooked tax breaks that
homeowners are eligible for?
A: Under certain circumstances, an employee or self-employed individual may
be entitled to deduct home office expenses. Generally, the space in the home
has to be used regularly and exclusively for business purposes.
Homeowners who incur a casualty loss may be entitled to a limited deduction. This type of loss would include damage from fire, storm or flooding. No deduction is allowed to the extent the loss is reimbursed by insurance.
Q: What tax breaks are available for a home purchased in 2007?
A: Property taxes paid in the year of purchase are deductible to the extent
allocable to the purchaser. Such allocation is made in accordance with the
number of days the home is owned by the purchaser. In many cases the
allocation is stated in the closing document.
Expenses incurred in connection with the acquisition for such items as transfer taxes, title search, broker’s commissions, appraisal fees and legal expenses should be capitalized and added to the cost of the home. Subsequent capital expenditures would also be added to the purchase price to determine the “basis” of the house. The amount of basis is used when the home is sold to determine gain or loss on the sale.
Moving expenses for the cost of moving household goods and personal effects, in addition to travel from your old residence to your new residence, may result in a limited deduction. To be eligible, a taxpayer must satisfy a distance test, a length of employment test and a commencement of work test.
Q: What are the new credits for energy efficient products and systems,
and what are they worth? What is eligible to be applied to your 2007 tax
return?
A: A credit is allowed for a purchase of qualified energy non-business
property. The allowable credit is between $50 and $300 based upon the
specific type of qualifying property purchased. The maximum credit for all
years (2006 and 2007) is $500 and no more than $200 of the credit can be
attributable to expenditures for windows.
For property placed in service after December 31, 2005 and before January 1, 2008, a tax credit for the purchase of qualified photovoltaic property and qualified solar water heating property is allowed. The qualifying property cannot be used for heating pools and hot tubs. The credit is equal to 30% of qualifying expenses with a maximum credit of $2000 per tax year.
Q: When is the best time to start preparing to take advantage of these
homeowner tax benefits? (In other words, to claim these write
offs/deductions, what are the deadlines to take action)? What is the
calendar timetable to do certain
things (throughout the year)?
A: Most taxpayers are on the cash method of accounting. Accordingly, these
deductions and credits are for amounts paid during 2007. Homeowners can
review and accumulate the information for the amounts incurred and paid
during the year and claim these items on their 2007 tax return prior to the
filing due date (April 15, 2008 or October 15, 2008,
if an extension of time to file is made).
Q: To maximize every loophole and tax advantage, is it always best to
hire a professional to do your taxes or can most of these benefits be
claimed by filing the taxes yourself?
A: Taxpayers with property taxes and mortgage interest falling under
definition of qualified residence interest can prepare their own return with
appropriate tax software. However, taxpayers may wish to consult with a tax
professional when more complex situations are encountered such as home
office, casualty loss, acquisition of home or energy credits.
Q: What are some important things homeowners should be aware of before
they attempt to claim a tax write-off/deduction?
A: Homeowners should retain documents supporting tax deductions and credits.
Annual statements are often received reflecting annual property taxes and
mortgage interest paid during the year. If a home was purchased during the
year, the closing statement should be reviewed for items impacting income
taxes.
Homeowners should also be aware of the home mortgage interest rules. A full deduction is allowed for interest on debt used to acquire, construct or improve a residence to the extent the debt does not exceed $1 million. Other mortgage interest on the home is deductible to the extent the mortgage does not exceed $100,000. These debts must be secured by the residence. The above limits are cut in half for married taxpayers filing separately.
Q: Any other important considerations regarding homeowner tax breaks to
consider?
A: The above does not describe the situation when the house is rented by the
homeowner. Special tax rules apply when the home or vacation home is rented
for part of the year.
In addition, the above does not describe the rules for the sale of a principal residence. Up to $500,000 of gain on a joint return ($250,000 on a single or separate return) can be excluded. The exclusion is available each time a principal residence is sold, but only once every two years.
Real Estate Focus is provided by Somerset’s Real Estate Team for our clients and other interested persons upon request. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. For additional information on the issues discussed, please contact Michael Fritton, CPA. Whether you are a building owner, building manager, real estate developer, real estate professional or an investor, we hope to provide you with timely information so you may be proactive in making your business decisions.
This article was written by and published herein with the permission from professionals of BDO Seidman, LLP. Robert Klein, CPA is a Tax Partner in the Woodbridge, New Jersey office of BDO Seidman. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
.jpg)