One of the benefits of owning a home is the deductions that homeowners can use when filling out their annual tax forms. While there are several tax benefits to owning your own home, some of these benefits are greatly exaggerated and some of them are simply misconceptions that are untrue. Here are some of the more common tax misconceptions and exaggerations that are out there so you can be aware of them.
Misconception #1: The interest that I pay on my mortgage provides me with a tax break.
For the majority of homeowners, mortgage interest does provide a tax break which is unavailable to renters. But in order to take advantage of this break, a homeowner must itemize their taxes. This means that the combined individual deductions are more than the standard deduction that an individual would automatically get each year. Most homeowners can itemize because their itemized deductions are greater than their standard deductions, but there are some rare instances when this may not be the case.
One of the times when standard deductions may be greater than itemized deductions is if a person buys a home near the end of the year. In this case, only a few mortgage payments are made before December 31 and the sum of these combined interest payments will be relatively low. An individual who has lived in their home for many years may not benefit from the mortgage interest deduction because the amount of interest as a propotion of the payment may be very small. As a result, there is not much interest to deduct. If this is the case, you won’t be benefitting much from the mortgage interest deduction.
Misconception #2: I can deduct any expenses for my home on my tax returns.
This is one of those misconceptions that is not only greatly exaggerated, but it’s simply untrue. Many homeowners think that any expense related to their home – private mortgage insurance, association fees, maintenance expenses and the like – are tax deductible. Some homeowners even think that they can deduct the costs for repairs, upgrades, improvements and other costs related to their home. But someone who tries to deduct these expenses stands a good chance of getting a letter from the IRS. Miscalculated or erroneous deductions open a homeowner up to interest and penalties along with a higher tax bill.
There are, however, some expenses that can be deducted. For instance, property taxes are deductible on federal income taxes. In some cases, capital improvements can also be deducted provided that they fit within the IRS guidelines. Because of the intricacies and details for these deductions, however, it is always best for an individual to consult with a professional before finalizing their annual income tax returns.
Misconception #3: Putting my son’s or daughter’s name on the title of my home is beneficial for tax purposes.
This is a common misconception but it is much more complicated than it seems. This misconception says that parents can put their child’s name on the title of their home in order to get a tax break in the event the parents die and the child decides to sell the house. The tax break would occur when the child sells the home. Unfortunately, it’s not that simple.
This misconception provides many parents with peace of mind about the future of their house after they are gone. Many older parents want their assets protected so that when something happens, their children won't loose the family home or be burdened by probate matters. The general idea behind this misconception is that if parents put their childrens' names on the house, it is no longer part of the parents’ estate for tax purposes. While this sounds logical in theory, it creates several types of tax problems for the children and even for the parents.
The IRS doesn’t allow parents to simply give their children the home that they own without tax ramifications, regardless if the parents are alive or deceased. Even if a parent "sells" the house at a bargain price while they are still alive, the IRS is going to base the child's tax responsibility on the difference between the selling price of the home and the actual selling price. Individuals are allowed to gift up to a $13,000 annually to any individual without tax consequences; you can’t easily go above that annual exemption without prompting the IRS’s scrutiny. In other words, should you transfer your home to your children or sell it to a child for less than an amount within $13,000 of the appraised value, you may be required to pay a significant amount in gift taxes (and your child or children may also face adverse tax consequences).
Because of the complications and details associated with transferring your home or any other significant assets to your children, it is always best to utilize the services of a qualified estate planner or estate attorney to make sure your interests and the financial interests of your children are protected. Such a professional may be able to put in place legal documentation which gives you the protection that you desire for your children.
There are many benefits to owning your own home. Some of those benefits include tax deductions. But if you are unsure about what you can and cannot deduct, you should always consult with a qualified accountant or tax professional. You should also do some calculations to make sure each deduction is the best possible avenue to take financially. With some help from professionals, you can make the best decisions for yourself and your family’s finances.