5 Things to Know About DC Homestead Deduction

5 Things to Know About DC Homestead Deduction

In the process of purchasing a property, it is hard to keep track of all of the elements involved.

Such elements can even include things that could be beneficial to the homebuyer. Therefore, we here at Federal Title do our best to keep homebuyers informed about their options in the homebuying process, like the DC Homestead Deduction, so that they can make the best decisions.

What is there to gain?

The DC Homestead Deduction provides valuable savings when it comes to what amount of the assessed value for your property is taxable.

Currently, the property tax rate is $0.85 per $100 in DC which means that .0085 of your property’s assessed value must be paid as a tax. However, if you are eligible for the DC Homestead Deduction, your property’s assessed value is reduced by $73,350.

Therefore, because the amount the government can tax is less, the money you must pay for the real property tax is less. However, the value by which your property is reduced changes annually and so it is important to stay up to date on that number.

Qualifications

In order to be eligible for the DC Homestead Deduction, there are four qualifications a homebuyer must meet.

First, a Homestead Deduction application must be filled out and on file with the Office of Tax and Revenue (link for DC Homestead Deduction application: https://otr.cfo.dc.gov/node/1299251).

In addition, the property, which cannot include more than five dwelling units, must be the principal residence of the owner/applicant.

Principal residency can be determined by where you pay your taxes, where you vote, what address is on you driver’s license, etc.

Finally, you must be domiciled in DC which means that you have a DC government issued ID, you are registered to vote in DC, and you file DC Personal Income taxes.

If these conditions are met, then you are eligible for the DC Homestead Deduction.

When do you begin receiving the benefits of the DC Homestead Deduction?

When the DC Homestead Deduction goes into effect depends on when the application for it was filed. If an approved application was filed between October 1 and March 31, then the DC Homestead Deduction will go into effect for that entire tax year and every tax year after that.

If an approved application was filed between April 1 and September 30, then the property will receive half of the deduction amount and then the following years after that it will receive the full deduction.

When should you cancel your DC Homestead Deduction?

There are several instances in which you must cancel your DC Homestead Deduction.

It is important that you can recognize the situations so that you don’t fall victim to the District of Columbia’s Homestead Deduction Audit Program.

Essentially, if the property is no longer your principal residence then you must fill out a Cancellation of Homestead Benefit form.

This means that if you moved off the property and are renting it out you must fill out the form. If you purchased another property in DC and filed for a Homestead Deduction on the property then you must fill out the form.

Are you still eligible if you are only a co-owner of a property?

If you are only a co-owner of a property and the other owners will not be living with said property as their principal residence then you are still eligible for the DC Homestead Deduction.

All that is required is that you meet the three qualifications which are that you are a principal resident, your property only includes five or fewer dwelling units, and you are domiciled in DC.

DC First-Time Homebuyer Defined

A “first-time District homebuyer” is defined as an individual purchaser who has never owned eligible property as the individual’s principal residence.  D.C. Official Code § 42-1101(16).  The term also includes an individual who has divorced or separated and who, by a written settlement agreement or court order, did not obtain an ownership interest in a principal residence that had previously been jointly owned.  In order for a deed to qualify for the reduced rate, each grantee named in the deed must be a first-time District homebuyer.

 

How to qualify for DC Homestead Deduction

Real estate agents and homebuyers often ask us about DC Homestead Deduction, a program that offers tax relief to District homeowners. Who qualifies and what are the benefits? 

As a complimentary service, Federal Title will complete and file the application as part of the closing services we provide.

Read the latest news on the DC Homestead Deduction.

Who Qualifies? 

  • An owner of a residential (1-5 units) property who occupies the property as a principal residence.
  • Must be a resident of the District of Columbia. Proof of residence may include obtaining a DC driver’s license, registering to vote, registering a vehicle, and filing of DC tax returns.
  • Generally, must be a US Citizen. Some G-4 visa holders may qualify as residents by providing a letter from their international organization employer.

View More Information About Qualifying Here

What are the specific benefits?

There are two main benefits to obtaining the Homestead Deduction. First, for the purpose of computing your yearly tax liability, it will reduce your real property’s assessed value by $72,450. At a tax rate of $0.85 per $100 of assessed value, that’s a annual savings of $615.82. Second, you are entitled to an assessment cap such that your property may not be taxed on more than a 10% increase in the property’s assessed value each year.

When does the Homestead Deduction take effect?

If a properly completed and approved application is filed from October 1 to March 31, the property will receive the Homestead Deduction benefit for the entire tax year (and for all tax years in the future). If a properly completed and approved application is filed from April 1 to September 30, the property will receive one-half of the benefit reflected on the second-half tax bill (and full deductions for all tax years in the future).

When should I apply for the benefit?

You should apply at the time of your closing or shortly thereafter. Federal Title can help you complete your application at the time of closing and, as a complimentary service, file the application on your behalf.

What if I have a Homestead Deduction on another property?

You cannot maintain a Homestead Deduction on a non-owner occupied property. If you no longer occupy a property that currently receives the Homestead Deduction benefit, you must notify the agency when eligibility ceases. View the Cancellation of Homestead Benefit form.

Information deemed reliable but not guaranteed. | Updated 31 August 2017

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.

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.

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