Homeowner Tax Breaks: Recent Developments

Learn about recent tax credits and tax deductions for homeowners.

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Congress regularly brings forth or revises the tax laws, often providing breaks for homeowners -- unfortunately, often at the same time that they take other breaks away or allow them to expire. Some recent tax provisions for homeowners include:

  • tax credits for energy-saving purchases for your home
  • a tax break for some defaulting homeowners
  • tax credits for first-time and some returning homebuyers (since expired)
  • a continuation of the mortgage insurance deduction, and
  • elimination of a tax loophole for owners of vacation or rental homes.

Read on to learn about these new tax breaks and determine whether any are available to you. (To learn about long-standing tax breaks for homeowners, read Nolo's article Your Home as a Tax Shelter: Top Ten Tax Deductions for Owning Your Home.)

Tax Credit or Tax Deduction: What's the Difference?

A tax deduction reduces your taxable income. For example, a $1,000 tax deduction reduces your $50,000 taxable income to $49,000. Lower taxable income means less taxes to pay.

A tax credit is an even better deal. It's a dollar-for-dollar reduction of actual taxes due. A $1,000 tax credit reduces a $1,000 tax bill to $1,000. If the tax credit is "refundable" and you don't owe any taxes, you get a $1,000 tax refund.

Energy-Related Tax Credits

Until 2016, homeowners who install solar, geothermal, or wind systems to generate electricity, or in some cases heat water, are eligible for a tax credit worth 30% of the cost of the system, with no upper dollar limit.

Another tax credit rewards people who install a fuel cell system to generate electricity. They get a tax credit of 30% of the cost, up to $500 per kilowatt of power generated. This credit is also due to expire in 2016.

Tax credits for qualifying energy-efficient home improvements were also available until December 31, 2011 for HVAC (heating, ventilation, and air conditioning) equipment, water heaters, roofing, doors, windows, and biomass stoves. The credit was worth up to 10% of the cost of the improvements, up to $500.

Taxpayers can claim the credits on IRS Form 5695 Residential Energy Credits, available from the IRS website at www.irs.gov. For the latest information on eligibility and expiration dates, see the Energy Star website.

Tax Break for Defaulting Homeowners

Ordinarily, debt that is forgiven by the lender is counted as income to the person who is no longer required to repay the debt. Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners whose lenders have forgiven their mortgage debt receive a tax break -- the amount of the forgiven debt is not counted as income for tax purposes. The law applies through the 2012 tax year.

The old law. Lenders sometimes allow homeowners who are defaulting on their mortgage to forgo payment of a portion of that mortgage -- for example, the lender might restructure a loan for less than the amount owed or permit a short sale, in which the homeowner sells the home for less than what's owed on the mortgage. Previously, when a lender forgave part of the homeowner's mortgage, the IRS treated this forgiven debt as taxable income.

The new law. Under the new law, debt that is forgiven by your mortgage lender does not count as taxable income by the IRS. There are some limits. The amount of forgiven debt that does not count as income is capped at $2 million. And the exclusion is available only for loans used to buy, build, or substantially improve a principal residence. Vacation homes, investment properties, and other second homes don't qualify. 

Tax Credit for First-Time and Longtime, Repeat Homebuyers

The Worker, Homeownership, and Business Assistance Act of 2009 aimed to bring some relief to the housing crisis. Among its provisions was a fully refundable tax credit of up to $8,000 for some first-time homebuyers and up to $6,500 for certain returning homebuyers. Unfortunately, the law has expired, but we'll summarize its provisions here -- especially for those people who may need to make sure they won't eventually have to pay the money back.

Definition of first-time homebuyer. For purposes of the tax credit, "first-time homebuyer" means someone who has not owned a principal residence (that means a home you live in) for the past three years. For married couples, the test applies to both -- neither can have owned a home within the previous three years.

Definition of repeat homebuyer. This means someone who has owned and lived in the same home for at least five consecutive years out of the last eight. For married couples, the test applies to both.

Eligible home purchases. The tax credit is available for homes bought by either first-time or returning buyers on or after January 1, 2009 and before April 30, 2010 (meaning you must have entered into contract by that April date and closed the purchase by September 30, 2010, after an extension of the original June 30 deadline). The home MUST cost less than $800,000.

Determining the amount of the tax credit. The first-time buyer tax credit was 10% of the purchase price, but capped at $8,000. The returning buyer tax credit was 10% of the purchase price, but capped at $6,500.

Income eligibility for the tax credit. If your sale took place after November 6, 2009, you were eligible for the full tax credit if:

  • you were a single taxpayer and your adjusted gross income (AGI) was less than $125,000, or
  • you were a married couple filing a joint return and your AGI was less than $225,000.

You may have been eligible for a partial tax credit if:

  • you were a single taxpayer and your AGI is more than $125,000 but less than $145,000, or
  • you were a married couple filing a joint return and your AGI is greater than $225,000 but less than $245,000.

Note that if you sell the house or stop using it as your primary residence within 36 months of the purchase, you must pay back the credited amount.

The income limits under a previous version of this law were significantly lower and still applied to people who bought their houses after January 1, 2009 but on or before November 6, 2009. These limits were $75,000 for singles (with a phaseout, partial credit available up to $95,000) and $150,000 for couples who are married and filing jointly (with a phaseout, partial credit available up to $170,000).

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