These days nearly everyone knows about both the costs involved in buying and selling real estate. For buyers, your primary expenses are going to be your down payment and closing costs that are associated with your home loan. For sellers, there are also closing costs including real estate agent commissions and tax stamps. However, the good news is there can be some savings when it comes to tax deductions for both sides of the transaction. Here is some information to review and make sure you are taking full advantage of your options.
Home Buyer Tax Deductions
Mortgage Interest – Some stipulations may have changed, but deducting your home’s mortgage interest in some capacity is still a healthy savings. For most, this will include nearly all of it. Especially earlier on in your loan’s term, this can be a large deduction.
Property Taxes – Depending on where you live exactly, your property taxes are typically deductible. This is also true for your second home should you have one. In the interest of saving on your actual tax bill, double check to see if you qualify for your town’s exemptions.
Private Mortgage Insurance – For homeowners with less than 20% equity in their homes, they are required to carry private mortgage insurance or “PMI.” Depending on your income, PMI is usually a tax deductible item. Note: You can terminate PMI once your home has appreciated enough to have met the equity requirements from your particular mortgage lender.
Points – Mortgage points can be a great option as some buyers can buy down their interest rate this way if they anticipate being in their new home long term. Make sure to record any points you have purchased on your taxes for a savings.
Energy Upgrades – There are tax credits available for some energy improvements. Things like solar panels, solar water heaters and similar often have credits available. Check with your accountant for ones that are currently offering the most incentives.
Home Equity Loan – Before you consider charging a large home improvement project on a credit card, consider taking out a home equity loan or HELOC. Just like interest on your primary mortgage, this is very similar where you can deduct the interest on your taxes.
Home Seller Deductions
Closing costs – Most costs related to the sale including legal fees, escrow fees, advertising costs, real estate agent commissions and even home staging fees can be deducted on your tax filing.
Home improvements – If you make improvements to your home to make it more marketable like painting and/or repairs then you can deduct these so long as you made these within 90 days of closing. Make sure to keep your receipts!
Mortgage interest – You can deduct the interest on your primary mortgage (up to a max of $750,000) for the portion of the year that you owned your property.
Capital gains – This is more of an exclusion rather than a deduction. If you have lived in your home at least two of the past five years, then you can exclude up to $250,000 of profit gains on your property or up to $500,000 if you are married.