Homeowner Tax Breaks: Recent Developments

Learn about recent tax credits and tax deductions for homeowners.

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Updated: April 4, 2016

Congress regularly brings forth or revises the tax laws, often providing breaks for homeowners. Unfortunately, it has a habit of canceling other tax breaks away or allowing them to expire at the same time. Some tax provisions to keep track of if you own a home or property include:

  • tax credits for energy-saving purchases for your home
  • tax break for some defaulting homeowners
  • tax credits for first-time and some returning homebuyers (since expired)
  • a continuation of the private mortgage insurance (PMI) 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 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 next April.

A tax credit is an even better deal. It's a dollar-for-dollar reduction of actual taxes due. So, a $1,000 tax credit reduces a $1,000 tax bill to zero. If the tax credit is what's called "refundable" and you don't owe any taxes, you get a $1,000 tax refund. (But this is the only situation in which you'd get a check from the government; contrary to popular opinion, this is not a "rebate.")

Energy-Related Tax Credits

Homeowners (of first or second homes) who install solar, geothermal, or wind systems to generate electricity, or in some cases hot water, are eligible for a tax credit worth 30% of the cost of the system, with no upper dollar limit. One could take this credit against the Alternative Minimum Tax (AMT). It's also good for purchases made in 2015. The credit expires at the end of 2016 with respect to geothermal and wind systems. For solar, however, it's available at 30% through December 31, 2019; then goes down to 26% for tax year 2020; then reduces to 22% for tax year 2021; then expires, on December 31, 2021.

Another tax credit rewards homeowners (of first or second homes) who install a fuel cell system to generate electricity, either in 2015 or 2016. They receive a tax credit of 30% of the cost, with no upper limit. The credit can be used either for an existing home or one being newly constructed. This credit is also due to expire at the end of 2016.

Tax credits for qualifying energy-efficient home improvements are also available until December 31, 2016 for insulation, heating and air conditioning equipment, heat pumps, water heaters (non-solar), roofing, doors, windows, and skylights, and biomass stoves. The credit is worth up to 10% of the cost of the improvements, up to $500. It can be used for purchases made in 2015.

Taxpayers can claim such credits using IRS Form 5695 Residential Energy Credits. 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, however, homeowners whose lenders have forgiven their mortgage debt received a tax break--the amount of the forgiven debt was not counted as income for tax purposes, up to a $2 million limit. Congress has extended this to the end of 2016. And if an agreement to discharge the debt is signed in 2016, the exclusion can be taken in 2017.

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 people who need to double check that 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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