State, federal tax benefits for homeowners

The ink has dried and keys have been exchanged. Your real estate agent snapped a few pictures for social media, commemorating the day you became a homeowner.

If you’re like most Americans, your home is now your largest asset. And while that comes with great responsibility, it also comes with some perks. Among those perks are the myriad tax benefits Uncle Sam has made available to homeowners, and here we will explore many of them.

  • Mortgage Interest Deduction

    Taxpayers who own their own home may deduct the interest paid toward their mortgage loan from their total income earned when it comes time to pay income taxes in April. The IRS says you can claim this deduction for a primary residence as well as a secondary residence such as a vacation home, provided you spend at least a few weeks out of the year at the secondary home.

    Points paid to lower home mortgage interest rate

    Some homebuyers and borrowers opt to pay “points” up front when obtaining a mortgage loan to lower the cost of their interest rate over the course of the loan. Each point is typically equal to 1% of the principal loan amount. The IRS says home mortgage points as prepaid interest, and therefore in most cases considers them tax deductible. Points paid on a home improvement loan, such as a home equity line of credit (HELOC) are also potentially tax deductible.

    Interest paid on home improvement loans, i.e., HELOC

    If you took out a home improvement loan to build or make improvements to your home, the interest may be tax deductible the IRS says, under the same guidelines as the mortgage interest deduction. It’s worth noting that to qualify for the full deduction the home interest benefit offers, the total amount of debt on all outstanding loans must be $1 million or less.

    Private Mortgage Insurance

    It’s common for homebuyers who put down less than 20% as a down payment to have to pay some kind of insurance policy on their mortgage loan. Amounts paid as mortgage insurance may be counted as home mortgage interest, the IRS says, which means private mortgage insurance (PMI) – also known as a "funding fee" for Veterans Affairs loans and "mortgage insurance premium" for FHA loans – may be tax deductible each year.

    Income / Interest on Reverse Mortgage

    A reverse mortgage is a loan product available for homeowners who are 62 years of age or older that allows them to convert the equity in their homes into cash. It’s called a reverse mortgage because the lender pays out the homeowner’s accrued equity each month rather than the homeowner paying a mortgage payment.

    The homeowners get to keep the title to their home and are not required to pay back the loan until they move, sell, reach the end of a pre-determined loan-period or die. At that time, the reverse mortgage would be due with interest.

    Because reverse mortgages are considered loan advances and not income, proceeds received from a reverse mortgage are not taxable, the IRS. Any interest accrued on the reverse mortgage is not tax deductible until it is paid.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936
  • Homestead Tax Deduction

    The District’s Homestead Deduction allows homeowners to reduce the value of their property’s assessed value by $71,700 when computing their yearly tax liability, under the DC's Office of Tax and Revenue’s current guidelines.

    At Federal Title, your closing agent or attorney will assist with filing the necessary paperwork. You must file a properly completed DC Homestead Deduction application with the OTC and be able to demonstrate the property is 1) your principal residence and 2) the property is owner-occupied and contains no more than five dwelling units (including the unit occupied by the owner).

    Read more about the DC Homestead Tax Deduction

    Senior Citizen Deduction

    This is an important tax benefit to be aware of not only for senior citizens living in the District of Columbia, but also for the buyers of homes that were previously owned by senior citizens because it can give the potential buyer / would-be owner a false sense of the annual real property tax assessment.

    Property owners aged 65 and older (as well as District residents who can claim disability) may file an application for senior citizen and disabled property owner tax relief. This benefit reduces the qualified property owner’s real property tax liability by 50%. Income restrictions may apply in addition to the criteria that must be satisfied to qualify for the DC Homestead Deduction.

    When searching for homes and condos online, it’s common for websites like Redfin, Zillow, Homesnap and Trulia to list the previous year’s real property tax assessment. However, it doesn’t necessarily indicate if the previous owner qualified for any kinds of tax benefits that may have significantly lowered the liability compared to what a new owner would be liable for.

    DC Tax Abatement

    The District’s tax abatement program was designed by the local government to help lower income residents purchase property. Homebuyers who qualify for DC Tax Abatement are exempt from paying recordation tax at settlement. What’s more, they are also exempt from paying property taxes for the first 5 years they live in the home, beginning the next full tax year.

    For those who were unaware of the DC Tax Abatement program when they purchased their homes, it’s possible to apply for this tax benefit up to three years from the original purchase date. You will still need the meet the guidelines and supply proper documentation; however if you in fact qualify you may be entitled to a refund of part of the recordation tax paid at settlement.

    Purchase price and income restrictions apply – and they change from time to time – so check in with the DC Office of Tax Revenue or ask your Federal Title closing agent for the latest information.

    Read more on DC Tax Abatement.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936
  • Homestead Tax Credit

    The Maryland Homestead Tax Credit operates to limit how much your property taxes can go up each year, if you live in the property as a principal residence. A homeowner pays no property tax on the amount of any increase of the assessed value that is above a cap. The Homestead Percent Caps for Maryland jurisdictions are listed on the website of the Maryland Department of Assessments and Taxation.

    In Maryland, if you meet the requirements and file an application, you may receive a discount on your real property taxes. To qualify you must 1) live in the property as your principal residence, 2) have been in the property as your principal residence for at least a year and 3) submit an application to the MD DAT.

    When you purchase your property, a document is typically filed with the deed stating you will be living in the property as your principal residence – each County has its own form. Once the Assessor’s Office for the County in which you purchased updates the assessor’s records to reflect you as the new owner, an Application for Homestead Tax Credit Eligibility is sent to your property.

    If you do not get an application via mail, you can download a Homestead Tax Credit application off the Maryland government website, fill it out and mail it in. Unlike other tax credits and exemptions, you need only apply once as opposed to every year.

    Read more about the Maryland Homestead Tax Credit.

    Homeowners Property Tax Credit

    This tax credit that offers relief for lower income homeowners sets a limit on the amount of property taxes any homeowner must pay based upon his or her income. Applicants must report total income – gross income before any deductions are taken – and the homeowner must provide documentation of all income sources, including non-taxable retirement benefits like Social Security and pensions, according to the Maryland Dept. of Assessments and Taxation. To qualify a homeowner’s net worth must not exceed $200,000 while the gross household income must not exceed $60,000 annually.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936
  • Mortgage Certificate Program

    This is a relatively new program for first-time homebuyers offered by the Virginia Housing Development Authority. The credit matches dollar-for-dollar 20 % of the total mortgage interest paid by the homebuyer each year, thus reducing the amount of federal income tax they owe. The remaining 80 % of the total mortgage interest paid that year remains eligible for a tax deduction.

    Like most of the tax benefits mentioned in this article, the Mortgage Credit Corticated program comes with income and purchase price limitations. Those amounts vary depending on where the house is located. In the DC metro area, the limits are $121,900 for households of two or less and $142,300 for households of three or more, while the purchase price limit is $500,000.

    Further, with this program a homeowner who sells his or her property in the first nine years of homeownership may subject to a federal recapture tax.

    Livable Home Tax Credit

    The Virginia Department of Housing and Community Development administers this $5,000 income tax credit that offers tax relief to individuals and corporations who purchase a new accessible residence and a credit of 50 % of the cost of improvements up to $5,000 to retrofit an existing property.

    Like most of the tax benefits mentioned in this article, the Mortgage Credit Corticated program comes with income and purchase price limitations. Those amounts vary depending on where the house is located. In the DC metro area, the limits are $121,900 for households of two or less and $142,300 for households of three or more, while the purchase price limit is $500,000.

    Further, with this program a homeowner who sells his or her property in the first nine years of homeownership may subject to a federal recapture tax.

    For a new residential unit to qualify, an applicant must be able to demonstrate the residence includes three features of “Universal Visitability” or include at least three accessibility features such as a zero-step entrance, doors with a minimum of 34 inches of clear width and hallways that are a minimum of 36 inches of clear width, according to the latest application guidelines.

    For a retrofitted unit to qualify, an applicant must be able to demonstrate improvements included at least one accessibility feature.

    Historic Rehabilitation Tax Credit

    Those who choose to purchase and rehab a historical property in Virginia may be eligible for a rehabilitation tax credit aimed at preserving the state’s historic homes. The credit is equal to 25 % of the rehabilitation expenses, while the work must also be certified by the Virginia Department of Historic Resources. The cost of the rehab project must be equal to a least half of the residence’s assessed value or 25 % if the residence is owner-occupied.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936
  • Office In-Home Tax Deduction

    Technically this would be a business expense tax deduction, but if you use a portion of your home as a home office, you may qualify for an Office In-Home tax deduction.

    To qualify for this benefit, the IRS says a taxpayer must use a specific area of his or her home strictly for business, although the space does not need to be marked off with a permanent partition.

    These Items are NOT Tax Deductible

    Most closing costs – title fees, home inspection fees, home warranties, real estate commissions and most other expenses related to the closing process are most likely not tax deductible. Only the items mentioned above are eligible for a tax write-off.

    Home improvements – costs associated with home improvements (outside of interest paid on a home improvement loan) are not tax deductible, but there is a silver lining. Since many home improvements add to the value of a home, it’s possible you could sell your property for more money down the road and recoup your investment.

    Transfer / Recordation taxes – these taxes are traditionally split by the homebuyer and seller in the DC metro area and are dependent on the sales price of the property. While they are not deductible, the IRS says buyers can include them in the cost basis of the property and sellers can reduce the amount realized on the sale.

    For Your Friends Who Are Still Renters...

    The District of Columbia and Maryland offer a tax deduction for renters to offset costs landlords add to their rental rates to pay their tax-deductible property taxes. Both credits come with income and other restrictions, but renters could get back as much as $1,000. Virginia does not currently offer a tax deduction for renters.

    Taking advantage of the renter tax credit is one way renters may be able to save toward a down payment on a house.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936

Did we miss anything?

Tax credits and deductions for homebuyers and homeowners are constantly changing, so please let us know if we missed one of your favorites or if you have another one to add to our list.

Hazard Insurance – If I change it, will it affect my mortgage?

If you are like everyone else, you have at least one New Years’ resolution.  Some choose weight loss, others fiscal awareness, other personal awareness, etc, etc.  If one of your resolutions is to lower your monthly costs and you are looking at changing your hazard / homeowner’s insurance, make sure you talk to your mortgage company.  

Why, you ask?  Well, you want to make sure you have enough insurance to meet the lender’s guidelines and the lender has notice of your insurer.  

What do you mean by "having enough insurance to meet the lender’s guidelines"?

If you change your insurance (lower your coverage), then there is a possibility you no longer have the amount of coverage required by your lender. Your lender is guided by the type of loan you have and specific guidelines provided to the bank either internally or by the government. You can contact your lender to get the list of requirements/guidelines for your coverage, so you can make sure you get the insurance that is best for your budget AND meet those requirements.

Why does it matter is I change insurance companies as long as I have the same or better coverage?  

In the documents you typically sign when getting a loan, there is typically a document stating you will keep your insurance intact and you will provide the lender proof of insurance – regardless of whether you have your insurance paid out of escrow or you pay the insurance directly. The lender will need to make sure the new company and the new policy meets the appropriate guidelines. The lender will also be checking to make sure it is listed on your policy as a mortgagee and the mortgagee clause is correct.

(Please note that the lender is focused on the fact that you are changing your insurance company. Does not matter if you are leaving your coverage the same, increasing coverage or decreasing coverage.)  

What happens if I do not contact the lender when I change to a new insurance company?  

The lender usually checks on insurance annually – whether you have a current policy and it has the appropriate coverage. If the lender checks in with the old company, it is likely the old company will report they no longer insure your property. When this happens and no new insurance company information has been provided to the lender, the lender will send a letter to you allowing you to provide proof of insurance. If you do not respond to this letter, the lender will put into place its own insurance – forced-place insurance is not easy to get removed.  

What is the bottom line?

When and if you change your hazard/homeowner’s insurance, call your lender to make sure those changes will not affect your loan servicing.

FHA to reduce cost of mortgage insurance

In an attempt to bring more First-Time Homebuyers back into the housing market, the Federal Housing Administration ("FHA") recently announced that it would reduce its annual mortgage insurance premiums from 1.35 percent to 0.85 percent.  

This is estimated to save borrowers approximately $1,000 per year on a $200,000.00 loan, for example.

After requiring a $1.7 billion bailout from the federal government as a result of a high number of loan defaults during the financial crisis in 2013, FHA more than doubled the mortgage insurance premiums to rebuild its funds and raised the average credit scores required in order to qualify for an FHA loan.  

Now that FHA has started to earn profits, industry insiders called for FHA to reduce the insurance premiums to allow more borrowers back into the market.  FHA has also stated that they will take additional steps over the upcoming months to reduce additional mortgage costs by cutting red tape and making lending standards more clear.

The new policy is expected to go into effect by the end of January 2015.

DC increases Homestead Deduction for second straight year

For the second straight year, the DC Office of Tax and Revenue increased the Homestead Deduction benefit from $69,100 to $70,200 for those DC residents who own and occupy their property as their principal residence. This results in an annual property tax bill reduction of $596.70.

Per the DC Office of Tax and Revenue, in order to qualify for the deduction, the homeowners must:

  • Submit an application with the Office of Tax and Revenue;
  • Occupy the property, and the property must not contain more than 5 dwelling units (including the unit occupied by the owner); and
  • Use the property as their principal residence

If the DC property owner files an application and it is approved by the Office of Tax and Revenue between October 1 and March 31, the benefit will be granted to the homeowner for the entire tax year and all future tax years.

If the application is filed and approved between April 1 and September 30, the benefit will be granted for the second half tax bill of that year and all future tax years.

You can complete the new form online, or visit the Office of Tax and Revenue’s Homestead Deduction website link for additional information.

Property tax relief for seniors

Did you know that the District of Columbia provides a substantial discount on real estate property taxes for seniors?

If eligible, a senior can save 50% on his or her property tax bill. Further, the threshold for the income level was raised to its current level on October 1, 2013 (previously the threshold was $100,000), so some seniors who were unable to qualify previously might want to take another look at their eligibility.

To be eligible:

  • At least one owner of the property must be 65 of older;
  • The total household adjusted gross income must be less than $125,000; and
  • The senior must have at least 50% ownership of the property to qualify.
Keep in mind that if the senior no longer occupies the property, or if any of the above eligibility requirements are no longer met, a cancellation form must be submitted to the DC Office of Tax and Revenue within 30 days of the change in eligibility.

Failure to do so could result in the DC Office of Tax and Revenue applying penalties and interest.

The Senior Citizen Tax Relief application can be found the DC Office of Tax and Revenue website.

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