While pretty much everyone but accountants and tax advisors despise tax season, homeowners have less reason than renters to hate the IRS. Whether you bought a home, sold a home, refinanced or just kept your home in 2015, you should be aware of the tax deductions available to homeowners so you can reduce your tax bill or celebrate with a nice tax refund. During the final days of 2015, Congress passed a federal budget that extends a few tax breaks for homeowners that were in danger of disappearing. The following guide can help you search for tax benefits, but as always, keep in mind that this general information is not a substitute for the advice of a tax professional. You can also find useful information for homeowners from the IRS Publication 530 at www.irs.gov/publications/p530/.
Seven tax breaks for homeowners
- Deduct your mortgage interest payments on all loans. In most cases you can deduct not only the interest you paid on the mortgage on your primary residence, you can also deduct interest payments on your home equity loan or line of credit and interest paid on a second home as long as those loans total less than $1 million.
- Deduct points paid on a purchase loan or refinance. If you bought a home in 2015 you can generally deduct the origination and discount points paid at settlement, since those are viewed as interest payments. If you refinanced or bought a second home last year, then you typically have to stretch out the deduction for those points over the life of the loan.
- Property taxes. You can write off the property taxes you paid all year and also deduct transfer taxes paid at settlement if you purchased a home last year.
- Mortgage insurance payments. One of the deductions saved by Congress at the end of the year is the deductibility of mortgage insurance payments – both private mortgage insurance on conventional loans and mortgage insurance paid on FHA loans. However, these deductions are limited by your income: if your adjusted gross income is $100,000 or less (for a married couple), you can write off all your mortgage insurance premiums. The deduction is phased out once your income exceeds $109,000 (or $54,900 if you’re single).
- Energy-efficient improvements. Congress also extended a 10 percent tax credit – up to a maximum of $500 – that directly reduces your tax bill. You can get a credit for 10 percent of what you paid for energy-efficient home improvements such as new windows, a more efficient heating and cooling system or extra insulation. You can get a bigger tax credit – 30 percent with no dollar limit – if you paid for renewable energy improvements such as solar panels or geothermal heating and cooling last year.
- Capital gains exemption. If you sold your home in 2015 for a profit, congratulations! And now there’s more good news: most people don’t need to pay taxes on that profit. Here are the basic rules: as long as the home you sold was your primary residence, you don’t have to pay capital gains taxes on up to $250,000 in profit if you're a single owner or up to $500,000 if you're married. The important requirements to qualify for this tax exemption are that the home not only must be your principal residence: you also have to have lived in it for at least two of the five years before you sold it.
- Mortgage debt forgiveness. If you were forced to sell your home in a short sale or foreclosure in 2015 or had your mortgage loan modified, the difference between the loan balance and the loan payoff amount after the sale or any loan balance reduction from a modification is viewed by the IRS as income. Income from a written-off debt is normally taxable at your normal tax rate, but in 2007 in the thick of the housing crisis, Congress passed an exception for mortgage debt to exempt people from paying taxes on that type of debt. Congress recently extended that mortgage debt forgiveness exemption retroactively through 2015 until the end of 2016.