Homeowners in the United States are entitled to several breaks on their taxes. These breaks may be in the form of a deduction or tax credit. Home-related deductions are only available if you use Schedule A to itemize instead of taking the standard deduction.
Deductions lower your adjusted gross income before the taxes are calculated. However, tax credits are available to all homeowners and directly reduce your taxes owed for the year.
The interest you pay on your home mortgage is deductible on Schedule A. This deduction is limited to loans of less than $1,000,000. If you used your home to secure a second mortgage or line of credit, you can deduct the interest paid on the first $100,000 of that loan.
Interest on a second home is also deductible if you spend at least part of the year there. You may claim an RV or boat as a second home if it has a restroom, cooking facilities and a sleeping area.
If you rent out your second home, you must spend at least 14 days or 10 percent of the number of rental days at the property or it will be considered a rental and your interest deduction will be disallowed.
If you paid points to reduce the interest rate on your home loan, these are also deductible. You may take the entire deduction in the year you purchased the home if the loan covers your main residence, the points were in a reasonable range for the market in your area, and paying points is a customary business practice in the region.
If any of these criteria do not apply, you must spread the points deduction over the entire term of the loan.
Property Tax Deduction
You may also deduct the property taxes you pay on your home. Some lenders include property taxes in your monthly payments and hold the amount in an escrow account on your behalf. These tax payments are still deductible on your Schedule A.
The lender must report the amount of your tax and interest payments on the statement you receive at the end of the year. In the first year you own the home, make sure to deduct any pro-rated property taxes that were included in the closing costs you paid at the time of the sale.
Energy Efficiency Deductions
Adding certain energy efficient improvements to the home qualifies you for a tax credit. You are allowed to claim 30 percent of the cost of installing a geothermal heat pump, small wind turbine, or solar energy system. Installing a residential fuel cell and microturbine system entitles you to a credit of 30 percent of the cost up to $500 per 0.5 kilowatt of power the system generates.
These credits expire after December 31, 2016. Through December 31, 2013, you may also claim up to 10 percent of the cost of insulation, metal or asphalt roofs, water heaters, energy efficient windows and doors, HVAC systems, and biomass stoves. The upper limit of the credit ranges from $50 to $500, depending on the type of equipment.
Katie Kent is a real estate agent from Tucson, Arizona. In her spare time, she loves writing about real estate, loans, the housing market, and Tucson mortgage rates.