Like many other classes of individuals, American homeowners and real estate investors can leverage a wide range of tax credits to reduce their upfront or ongoing ownership costs. Some of these apply to middle-class homeowners who live in the same detached house or condominium for years on end. Others apply to business owners and commercial real estate professionals who make a lucrative living in the real estate business. A list of the five most common and useful real estate tax credits follows.
1. Mortgage Interest Tax Deduction
This is a virtual "gimme". Most individual homeowners can take advantage of the mortgage interest tax deduction, and its popularity shows no sign of slipping. In fact, this tax break has been credited with jump-starting the now-familiar culture of homeownership and putting a generation of working-class and middle-class Americans at the helm of their own financial destiny. The mortgage interest tax deduction applies to primary-home mortgages with values of up to $1 million. It generally can't be claimed on second homes, rental properties or commercial-residential hybrid properties.
2. Landlord Interest, Depreciation and Repairs
Although these are technically three separate tax credits, they're usually bundled together for practical purposes. After all, every landlord must pay interest on his or her mortgage, offset the financial drain of asset depreciation, and make periodic repairs to his or her properties. The "interest" part of this landlord-focused credit works much like the mortgage interest tax deduction: It permits landlords to use a tax credit to offset a portion of the interest on their building loans.
Meanwhile, "depreciation" accounts for the natural deterioration of a residential unit's building stock over time. Landlords generally take this credit during the first several years of their ownership tenure. Finally, landlords can offset "necessary and ordinary" repairs that don't markedly improve the unit's appraised value. Such repairs might include painting, flooring, appliance replacement and window replacement.
3. Profits Deduction
Homeowners who sell their homes for a profit are required to pay capital gains taxes on the total amount that they earn in the sale. This well-known requirement applies to sales of other types of assets like stocks, bonds and commodities. However, the tax code currently permits individual American homeowners to offset their tax liabilities on real estate profits of up to $250,000. For married homeowners who file their taxes jointly, this bonus jumps to $500,000. For this credit to apply, the sold home must have been a primary residence for two out of the previous five years. As such, this credit can't be claimed more than five times in a decade.
4. Energy-Efficiency Tax Credits
To encourage homeowners to use efficient building materials and appliances, the federal government sponsors a whole slew of energy-efficiency tax credits. Depending on the cost and efficiency rating of the product in question, these credits can offset as much as 30 percent of the purchase price for an efficient appliance or fixture. Although these credits often change from year to year, appliances and materials that tend to remain eligible may include:
- Solar water heaters
- Geothermal power systems
- Energy-efficient lights and windows
- Thermal insulation
- Efficient kitchen and laundry appliances
5. Home Office Deduction
Individuals who work out of their primary residences are eligible to claim income-tax offsets for many of their operational expenses. Outlays for electronic equipment, office supplies, postage and furniture are generally covered by this tax deduction. The cost of dedicated utilities like business phone lines, fax lines and high-speed Internet connectivity may also be deductible. What's more, homeowners who use residential utilities in the course of their home-office duties can offset a portion of those as well.
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