Tax Deductions For Home Owners

There are many tax benefits to owning a home, including the ability to deduct your mortgage interest and real estate taxes and other tax incentives.

In addition to the most common deductions - mortgage interest and real estate taxes - you may be able to deduct energy efficient home improvements (available for 2009 only at the time of this writing).

If you happen to work from home you may be able to deduct expenses related to your home office as well.

In this hub, we'll talk about some of the tax advantages of being a home owner, and how to get the most out of those benefits.

The interest you pay on your mortgage is probably the largest deduction you get as a home owner.

The interest on your primary mortgage is deductible. The interest deduction is available on the following types of loans:

• mortgage on your primary home
• second mortgage

• line of credit

• home equity loan

You can also deduct the interest paid on a second home (see limits below), however, you can't deduct interest on a mortgage for a third home, a fourth home, and so on.

The amount of interest you can deduct is limited to:

• the fair market value of your home, or

• $1 million ($500,000 if you're married and filing separately from your spouse)

Real estate taxes paid on your house is usually the second largest tax benefit of owning a home.

The real estate taxes you pay are based on the assessed value of your house. You can pay for these taxes out of your escrow account (if you are still paying on the mortgage), or you can pay the taxes directly (usually billed twice a year).

If you use your escrow account to pay your real estate taxes, your mortgage interest statement should list the amount of real estate taxes you paid for the year.

If your real estate taxes aren't included in escrow payments made with your mortgage payments, check with your county tax collector to determine how much you paid for property taxes during the year (you should get a statement and/or a receipt showing this information once a year).

If you buy a new house during the year, make sure you pick up any real estate taxes included on your settlement or closing statement in addition to the amount paid through your escrow account.

Real estate taxes paid are deducted on Line 6 of Schedule A, which is then attached to your Form 1040.

You may recall that In 2006 and 2007, if you made energy efficient improvements to your home - such as installing new windows that met energy efficient guidelines - you were allowed a credit on your tax return. This credit expired on December 31, 2007, but has been resurrected for 2009 (right now it is for 2009 only, but hopefully it will be extended even further).

The credit equals 10% of the purchase price of energy efficient products.  The products must meet certain criteria, so it's best to ask before you start your home improvement project. The maximum credit is $500, of that $500 only $200 can be used for new energy efficient windows.

Here are some examples of home improvements that may qualify for the credit:

* exterior doors and windows,
* storm windows,
* skylights,
* metal roofs,
* insulation,
* central air conditioning and heating,
* geothermal heat pumps,
* hot water boilers, and
* advanced main air circulating fans

For more information on which improvements qualify, please visit www.EnergyStar.com.

If you are self employed and work from home, one of your biggest tax deductions may be your home office. Here are some tax tips to help you get the most out of your home office.

Your home office qualifies for the home office tax deduction if it is your principal place of business, and you use it regularly and exclusively for business.

To pass the ‘place of business' test, your home office must be the principal place you conduct your business, or a place where you regularly meet with clients or customers.

Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don't use this room for other purposes.

A good example of a home office that would qualify for the home office tax deduction is a spare bedroom that is used only to operate your home based business. A poor example of a home office is using your dining room or kitchen as a home office.

Expenses that can be deducted include mortgage interest, real estate taxes, utilities, insurance, repairs, security, and depreciation.

If you itemize deductions, chances are you are already deducting your mortgage interest and real estate taxes. However, deducting the business use of these expenses on the home office deduction schedule reduces your business income, which reduces your self employment tax. This results in much greater tax savings than just deducting these expenses on Schedule A.

You are only allowed to deduct the portion of these expenses that relate to your business. The business use percentage is calculated by dividing the square footage of the office space by the square footage of the home, or by dividing the number of rooms you use for business by the number of rooms in your home.

Direct expenses, such as repairs made solely to the room used for your home office, or telephone lines installed just for business use, can be deducted in full.

Indirect expenses, such as mortgage interest and real estate taxes should be allocated between the home office deduction and your itemized deductions to get the greatest tax benefit.

Your home office tax deduction is calculated on Form 8829, Expenses for Business Use of Your Home.