Happy New Year! January is the time for starting out with a clean slate and vowing to make changes that are good for us. In spite of our good intentions, however, by now many of us have made–and broken–many familiar resolutions and have fallen back into bad habits. Despair not. There is one action you can begin right away, stick to without hardship or self-denial, and benefit greatly from in just a few months. The holiday season may be behind us, but tax season is not far away, and you can resolve to get an early start by identifying house-related tax deductions now and gathering the necessary documentation for them.
Doing so provides you with a win-win situation. Not only will you get a head start on a sometimes onerous task, you will also derive pleasure from seeing how much money you will save simply by owning Jersey Shore real estate. The following information is current as of now, but I urge you to check with your accountant, visit the IRS website, or call the IRS assistance line at 800-829-1040 for verification and/or specifics.
PART 1–PRIMARY RESIDENCES
- MORTGAGE INTEREST: As you know, much of your mortgage payment goes toward paying off interest, especially in the early years. All this paid interest, on debts of up to $1 million on a joint return, is tax deductible. The amount you have paid is reported to you on a 1098 form sent by your lender and should be reported by you on line 10 of a Schedule A form (itemized deductions).
- HOME EQUITY LOAN INTEREST: Interest paid on home equity loans (second mortgages, equity credit lines, and some refinancing) is fully deductible up to $100,000–regardless of how you use the proceeds. If you use some or all of the proceeds for home improvements, that amount can be added to the $100,000. Be sure to carefully document all improvement costs. Note: The limits mentioned apply only as long as all debt secured by the residence does not exceed the fair market value of the Jersey Shore property.
- POINTS: The points you paid to the lender at closing are deductible for the year in which you paid them. This amount is also reported to you on the lender’s 1098 form. See publication # 936 from the IRS for more specific information, especially about points paid for refinancing.
- PROPERTY TAXES: Jersey Shore real estate property taxes are fully deductible.
- PRIVATE MORTGAGE INSURANCE: If your mortgage was taken out between 2007 and 2010 and your joint income is below $100,000, you can deduct any premiums you paid. Note: This is the last year that you can take this deduction.
- HOME OFFICE: If you use a portion of your home exclusively for business purposes, there are certain costs you can deduct. Such expenses may include a percentage of your utilities, repairs, qualified insurance premiums, and even property taxes. The IRS has specific requirements for these deductions. Consult IRS publication #509.
- SELLING YOUR HOME: In addition to being able to pocket as much as $500,000 tax free in profit if you file jointly and have lived in the piece of Jersey Shore real estate for two of the past five years, you can also deduct from your taxable capital gain many costs which you incurred while selling the property. Such costs usually include Realtor commissions, legal and inspection fees, and title insurance. In addition, cosmetic repairs and improvements you made to the home within 90 days of the sale are also deductible.
TAX CREDITS: These are even more beneficial than deductions and fall into two categories for the 2010 tax year.
1. HOMEBUYER TAX CREDIT: Buyers who purchased a house before May 2010 and qualified for a Homebuyer Tax Credit may claim that credit by mailing in (you cannot file electronically) your return with IRS Form 5405. Members of the military, foreign service, and intelligence communities have until April 30, 2011, to purchase a home and be eligible for this credit.
2. HOME ENERGY TAX CREDIT: If you installed qualified energy-efficient systems, windows, and/or appliances in your home before December 31, 2010, you may be eligible for a tax credit of up to $1500. Again, you may not file electronically, and you must complete and attach IRS Form 5695 to your return.
FORGIVEN DEBT: Mortgage debt to buy a principal residence that is forgiven (as in a short sale, foreclosure, or debt restructuring) is no longer taxable in many cases. Restrictions apply for investors, equity lines, refinancing, etc. See IRS Publication 4681 for detailed information and use IRS Form 982 for filing.