A: It depends on how those improvements were funded. If you took out a home improvement loan, commonly referred to as a Home Equity Line of Credit (HELOC), or some other loan secured by your home to pay for the improvements, then you allowed to write off the interest expense on your federal income taxes if you itemize those deductions on your federal return. If you paid cash or used a credit card, you'll need to take out a HELOC to pay off the credit card balance or reimburse yourself in order to take the deduction. On a side note, keep track of what you paid to improve the home. You can subtract these costs, along with the costs to sell and costs of purchase, to determine a tax basis for the property.
Q: I just purchased a home, what deductions am I allowed to make on my federal taxes this year?
A: One of the most well known deductions that comes with home ownership is the ability to write off the interest you pay on your mortgage loan. You are only able to write off up to $1,000,000 and I don’t feel bad for those of you who have an interest amount higher than a million. This applies to your primary home and can also apply to a secondary home if you spend the necessary amount of time there, about 14 days per year or 10% as much as it’s rented.
When it comes to other types of loans that use your home as a security, HELOCs, you can deduct up to $100,000 of the interest as long as the total amount borrowed did not exceed the value of the home. During your first year of ownership, you'll receive a statement from your mortgage lender showing the amount of mortgage interest you paid that first year.
You can also deduct the cost of any points paid at the time of purchase. Points are pre-paid interest to the bank that results in a lower interest rate. In the future, you may choose to refinance your mortgage or take out a second mortgage. If you purchase points at that time, you may have to amortize that deduction over the life of the loan. The exception is if that loan is used to improve your home. The full amount can then be deducted within the first year.
Property taxes are another deduction allowed on your federal return. This includes both your primary residence and other properties owned as secondary homes or rental property. If you received a tax bill during that first year of ownership, be sure to include that amount on your return. The funds held in escrow to pay future taxes are not deductible.
Lastly, you are allowed to write off moving costs for a new home purchase if that home is at least fifty miles closer to your job that your prior residence. There is a stipulation that you must continue at that job for 39 weeks of the following year after the move. For those of you who work from home or are self employed, you are also able to deduct your moving expenses as long as your continue working at your job for 78 weeks over the next 2 years.
Q: I sold my house last year after living in the home since 1995 and made a profit of $300,000. How much of this profit is taxed?
If you lived in the home for 2 of the last 5 years, you are able to exclude up to $250,000 in profit from being taxed, and $500,000 for a couple who files jointly. This exclusion also covers land that is adjacent to your home as long as it wasn’t used for business.
Because tax rules vary based upon income and additional factors, please consult a tax professional for specific questions about your situation.
