Don’t Miss These Home Tax Deductions

Owning a home can pay off at tax time.

Take advantage of these homeownership-related tax deductions and strategies to lower your tax bill:

Mortgage Interest Deduction

One of the neatest deductions itemizing homeowners can take advantage of is the mortgage interest deduction, which you claim on schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home — and your home can be a house, trailer, or boat, as long as you can sleep in it, cook in it, and it has a toilet.

Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or improve your home.

If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit.

If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.

PMI and FHA Mortgage Insurance Premiums

You can deduct the cost of private mortgage insurance (PMI) as mortgage interest on Schedule A if you itemize your return. The change only applies to loans taken out in 2007 or later.

By the way, the 2014 tax season is the last for which you can claim this deduction unless Congress renews it for 2015, which may happen, but is uncertain.

What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized downpayment (usually 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).

If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that your adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return). So, if you make $110,000 or more, you can’t claim the deduction (10% x 10 = 100%).

Besides private mortgage insurance, there’s government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing, and deducting them is complicated. A tax adviser or tax software program can help you calculate this deduction. Also, the rules vary between the agencies.

Prepaid Interest Deduction

Prepaid interest (or points) you paid when you took out your mortgage is generally 100% deductible in the year you paid it along with other mortgage interest.

If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.

But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the life of your mortgage. Say you refi into a 10-year mortgage and pay $3,000 in points. You can deduct $300 per year for 10 years.

So what happens if you refi again down the road?

Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the life of the loan.

Home mortgage interest and points are reported on Schedule A of IRS form 1040.

Your lender will send you a form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the HUD-1 settlement sheet you got when you closed the purchase of your home or your refinance closing.

Property Tax Deduction

You can deduct on schedule A, the real estate property taxes you pay. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.

If you bought a house this year, check your HUD-1 settlement statement to see if you paid any property taxes when you closed the purchase of your house. Those taxes are deductible on Schedule A, too.

Energy-Efficiency Upgrades

If you made your home more energy efficient in 2014, you might qualify for the residential energy tax credit.

Tax credits are especially valuable because they let you offset what you owe the IRS dollar for dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades.

The credit carries a lifetime cap of $500 (less for some products), so if you’ve used it in years past, you’ll have to subtract prior tax credits from that $500 limit. Lucky for you, there’s no cap on how much you’ll save on utility bills thanks to your energy-efficiency upgrades.

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January 2015 Michigan Market Update

The overall market in December continued the trend of sales growth for the second half of 2014, but at a slower rate. December’s new sales contracts picked up in all price ranges after a lull in November. For Sale inventories continue to fall in the under $250,000 category, while rising in all price ranges above $250,000. New listings entering the market are following that same trend. Price per square foot went up over 8% for the under $250,000 market compared to last December, while the values of the over $250,000 market are coming in at under 3%.

The chart above combines the sales from November 2014 and December 2014, smoothing out the swings that occurred during both months. The increase in pending sales for the over $250,000 range was surprising. This change was most likely a result of sellers moving to take advantage of the jump in home values, which has occurred in the last few years. Simultaneously, more homes were available for purchase, prompting some buyers out of the woodwork. However, we don’t expect sales to continue increasing at that pace into 2015.

The charts follow the percentage of change between 2013 and 2014 for each month, showing the direction of the market for sales, home values and For-Sale inventories. Across all price ranges, For Sale inventories rose throughout 2014, slowing in the fall season, but continuing to rise in the over $250,000 segments. For Sale inventories actually fell in the under $250,000 market, which made finding a home more challenging for first-time home-buyers. Pending sales gained momentum in all price ranges as the year progressed, recovering from a slow, cold winter. The improving economy later in the year has provided some good momentum going into 2015. Home values (here shown as price per square foot) increased throughout the year, but at a declining rate, as a result of more competition with more homes for sale and a squeeze in housing affordability (due to the big jump in values in 2012-2013).

For 2015, the overall economic indicators look good with continued historically low interest rates, increasing home values and improving employment and income numbers, particularly in the under-35 age group. The first-time home-buyer market has been lagging during the recovery, but changes in low down payment and FHA loans should help boost that segment this year. The rest of the world appears to be less stable with flat to slowing economic growth, making the U.S. the shining economic star globally. This may be bad for U.S. exports, but good for housing by keeping mortgage rates low.

The general consensus among economists seems to be that 2015 will be as strong or stronger than in 2014 in terms of the number of homes sold and the number of new homes built, but slower in terms of appreciation rates. We think Southeast Michigan home sales may be off by 3-4% compared to 2014, with a chance of a breakeven. Since we recovered ahead of most of the country, we have been one of the first to move to market equilibrium. If there are any surprises in terms of home sales in 2015, they should be pleasant surprises since we are using a more conservative view.

Although housing continues to show steady trends in terms of appreciation and the number of homes sold, the economic momentum should be creating more housing activity than it is. There are a number of primary suspects that are holding back activity: tougher credit standards, added jobs that are lower paying, record student loan debt and an overall more cautious consumer. All of these counter the positive economic momentum, which is keeping housing on a steady pace. Although we all love a wild market, a steady pace is healthy. It is actually quite amazing (and a positive long term trend for housing) that our market activity has been so strong in spite of the hold-backs. Home equities are just now getting near 2005 peak levels and the fast appreciation we have seen in the past two years has made home purchases less affordable, particularly for the first-time home-buyer segment. Over the next 3-5 years, the buyers and sellers who are being held back from these various conditions will jump back into the market at the first chance, resulting in a steady future flow of business.