Use Your Home to Give Yourself a Tax Break
Before you throw up your hands at the cost of homeownership, add up all the ways it pays off on April 15
You already know about deducting mortgage-interest payments and property taxes. But did you also know you could qualify for a $6,500 credit toward the purchase of a second home—as long as you move into it? Or that Uncle Sam will fork over up to $1,500 to defray the cost of a pellet stove or water heater? With some 300 changes to the tax code last year alone, keeping up with the latest breaks can be harder than installing your own heat pump. So we asked CPA Bernie Bossert, a researcher at the Tax Institute at H&R Block, to brief us. Read on for more reasons to love owning the roof over your head.
Q: Deductions and credits: What's the difference?
A: A deduction reduces your taxable income. A credit reduces your taxes, dollar for dollar. A $100 deduction may decrease your taxes by $15, while a credit will reduce them by $100.
Buying and Selling a Home
Q: What's the deal with credits for first-time home buyers?
A: If you buy a second home but keep the first one, you may qualify, provided you move into the new one. Income limits apply, but generally if you have owned and lived in a home for at least five consecutive years over the past eight and bought a new one between November 7, 2009, and April 30, 2010—or have one under contract and will close before July 1, 2010—you can get back 10 percent of its purchase price, up to $6,500.
If you're a first-time buyer or haven't owned a home in the past three years, you can get back 10 percent of the purchase price of a new home, up to $8,000. You can take advantage of this credit on your 2009 or 2010 return.
Keep in mind: You have to include a copy of your closing statement, so you won't be able to file electronically. And if you move within three years, you may have to give the money back.
Q: Let's say I sell my house for more than I paid (wishful thinking, I realize). Do I have to pay taxes on the capital gain?
A: You can exclude a gain of up to $250,000, assuming the home was your primary residence during two of the five years preceding the sale. And that amount grows to $500,000 if you are filing jointly as a married couple. The law was tweaked recently to require the seller to pay some tax on the capital gain if the house was used to generate rental income after 2008. Still, it's a handsome tax break.
Q: What about tax credits for home improvements?
A: Most apply to energy saving. And they exist on top of those "cash for clunkers" appliance rebates and energy-related state incentives.
Q: Lots of people now find they are working from home. Can they deduct the cost of a home office?
A: As long as a room or distinct portion is used exclusively and regularly for business purposes. You can't get a deduction if your office doubles as a guest room or you operate your business from the kitchen table. You'll need to do some calculations and document your claim—I suggest photographs.
Q: Any breaks for fixing up an old house?
A: If a building is certified as historic, you may be able to claim a credit for 20 percent of the renovation costs. Your state historic preservation office should have details.
Q: Can I get a federal tax credit to help buy an energy-efficient dishwasher?
A: Sorry, appliances don't qualify. But there are plenty of breaks if you invest in energy saving in your principal residence between January 1, 2009, and December 31, 2010. And you can use these breaks even if you benefited from similar ones in earlier years.
High-efficiency central heating and cooling systems, water heaters, biomass stoves, windows and doors, insulation, and heat-deflecting roofs are among the upgrades that qualify. For details, go to .
The credit represents 30 percent of the purchase price of one or more products, maxing out at a total of $1,500 combined for both years. In the case of central heating and cooling, you can apply the credit to labor costs, too. Keep in mind that products must have high Energy Star ratings and are expected to be in use longer than five years.
You'll need to keep a certification statement from the manufacturer or installer and fill out a Form 5695 (available at ). And if you're audited, you'll have to produce receipts and proof of installation; buying an energy-efficient water heater and storing it in the garage doesn't count.
Q: What about switching to alternative energy?
A: The tax credits here are even more generous: up to 30 percent of the cost, with no cap, for big-ticket items such as solar electric, solar hot water, wind power, and geothermal heating and cooling. If you can't take full advantage of the credit on your 2009 return, you can carry some of it over to your 2010 return.
Credits for alternative energy are authorized through 2016, so if you haven't made the switch yet, there's still time.
By the way, the solar hot-water subsidy applies to your daily hot-water needs, not your pool or hot tub.
April 15 Checklist
Consult your tax accountant or financial adviser. You may deserve a break if, during 2009, you:
...bought a home. You may be able to get back $8,000.
...paid real estate taxes on a first or second home (including a livable RV!). You can take a deduction for real estate taxes in 2009 even if you don't itemize.
...took out a home-equity loan. If you borrowed up to $100,000—and spent it on anything, be it home related or not—you may be able to deduct the interest.
...refinanced to pay for a renovation. If you refinanced with a mortgage of up to $1 million to make improvements, you may be able to deduct the interest as "home acquisition debt." Caveat: The allowable amount is affected by your home's fair market value.
...endured a fire, storm, or other calamity. You may be able to deduct a portion of your unreimbursed losses.
...made certain energy-saving investments. It's not quite cash for caulkers, but almost.
Bernie Bossert, Tax Institute at H&R Block, Kansas City, MO.
"Don't wait till April to organize receipts and documents. Color-code them for easy sorting."