?Owning a Home Can Cut Tax Bill ?

homeownership is plus during tax timeAt tax time, homeownership can be sweet.

Mortgage interest is the best known tax deduction for homeowners, but it’s not the only one available. Potential deductions are available for other costs associated with purchasing a home, certain energy efficient repairs and even modifications for a disabled family member.

There’s also a bit of good news for homeowners who were in serious financial distress last year.

Taxpayers who have debts reduced through forgiveness may be unpleasantly surprised to learn that whatever portion they don’t have to pay is considered income by the Internal Revenue Service. But that’s not the case through 2013 for debt slashed from mortgage modifications or debt written off on foreclosed homes sold for less than the value of the outstanding mortgage. The Mortgage Debt Forgiveness Relief Act of 2007 allows those individuals to omit forgiven debt from their income, up to $2 million ($1 million for married filing separately).

This rule does not, however, apply to home equity lines of credit that were used for purposes other than constructing, acquiring or improving the house. So taxpayers who were forgiven debt from a HELOC used to pay down credit card bills or pay college tuition will have to report the amount as income.

Also, homeowners with modified loans will have to recognize the amount forgiven if they eventually sell their home, warned Mel Schwarz, a partner in Grant Thornton’s national tax office in Washington. But for those experiencing financial distress right now, the ability to delay paying taxes on forgiven debt will be a relief.

Here’s a rundown of deductions homeowners may be entitled to:

? Mortgage interest

Homeowners can deduct all of the interest they pay on their first mortgage, up to $1 million. For a second mortgage or home equity line of credit, up to $100,000 in interest payments may be deducted.

? Mortgage insurance premiums

If you pay insurance premiums on a mortgage issued after Jan. 1, 2007, you may be able to take an itemized deduction. Homeowner’s insurance premiums covering events like fire and property damage are not deductible.

? Real estate tax

Taxes paid to local and state governments are deductible if they’re based on the assessed value of the property. New homeowners may deduct any partial-year taxes paid during the closing.

Owners who live in private communities should make sure they deduct only tax payments, and not payments for special privileges (like a community swimming pool) or services (like trash collection or snow removal.) Homeowner’s association fees and assessments are also not deductible.

? First-time homebuyer credit

Anyone who purchased before May 1 may be eligible for a credit of $8,000 or 10 percent of the purchase price of the home, whichever is smaller. There is also a provision providing this credit for homebuyers who signed a contract before May 1 to purchase the home before July 1, even if the closing was delayed as late as Sept. 30.

The credit does not apply for homes purchased for more than $800,000 or for individuals whose income topped $145,000 ($245,000 for married filing jointly.)

Homeowners who claimed the 2008 first-time homebuyer’s credit must start paying that amount back this year.

“Essentially what they were provided was not a credit but an interest-free loan,” said Robin Christian, senior analyst for the tax & accounting business of Thomson Reuters. There’s a 15-year repayment period, so someone who took a $7,500 credit must pay $500 a year.

“The IRS is supposed to be sending out notices to people who claimed that credit reminding them that they are to pay it back,” Christian added.

? Purchase points

Certain charges paid by a borrower to obtain a mortgage, known as “points,” may be deducted in part or in full. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Appraisal fees, inspection fees, title fees and attorney fees are not deductible.

? Energy-efficient improvements

Homeowners who installed insulation, energy efficient windows, doors, air conditioning systems or certain other items in 2010 may be able to claim a credit of 30 percent of the costs, up to $1,500. Those who installed solar water heaters, geothermal heat pumps and other alternative energy equipment may be able to deduct 30 percent of their costs, with no cap. The maximum claim under this credit drops to $500 for 2011.

? Disability modifications

Modifications like accessible bathrooms, wheelchair ramps, wider doorways and stair lifts that are made in relation to a medical condition may be deductible as part of medical expenses. The changes to the home must have been made to meet the medical needs of the taxpayer, spouse or dependent and not be considered an improvement to increase the value of the property.

The addition of a swimming pool may qualify with documentation from a doctor that it was medically necessary, said Christian.

The costs can only be deducted if together with other medical expenses they exceed 7.5 percent of adjusted gross income.

? Home offices

Rooms or other parts of a home that are set aside for business may qualify for home office deductions. That would allow a homeowner or renter to claim a portion of utilities, insurance and maintenance costs. The space must be the principal place of business, meaning that it is used for meetings with clients or customers or, for example, to operate an online business.

Generally, home office deductions are based on the percentage of the home devoted to business use. Employees who use part of their home for business for the convenience of their employer may also qualify for this deduction.

More detail on each of these deductions is available on the IRS website at www.irs.gov .

Source: The Associated Press.