Category: tax

Don’t rouse the IRS or pay more taxes than necessary — know the score on each home tax deduction and credit.

As you calculate your tax returns, be careful not to commit any of these nine home-related tax mistakes, which tax pros say are especially common and can cost you money or draw the IRS to your doorstep.

Sin #1: Deducting the wrong year for property taxes

You take a tax deduction for property taxes in the year you (or the holder of your escrow account) actually paid them. Some taxing authorities work a year behind — that is, you’re not billed for 2013 property taxes until 2014. But that’s irrelevant to the feds.

Enter on your federal forms whatever amount you actually paid in that tax year, no matter what the date is on your tax bill. Dave Hampton, CPA, a tax department manager at the Cincinnati accounting firm of Burke & Schindler, has seen homeowners confuse payments for different years and claim the incorrect amount.

Sin #2: Confusing escrow amount for actual taxes paid

If your lender escrows funds to pay your property taxes, don’t just deduct the amount escrowed. The regular amount you pay into your escrow account each month to cover property taxes is probably a little more or a little less than your property tax bill. Your lender will adjust the amount every year or so to realign the two.

For example, your tax bill might be $1,200, but your lender may have collected $1,100 or $1,300 in escrow over the year. Deduct only $1,200 or the amount of property taxes noted on the Form 1098 that your lender sends. If you don’t receive Form 1098, contact the agency that collects property tax to find out how much you paid.

Sin #3: Deducting points paid to refinance

Deduct points you paid your lender to secure your mortgage in full for the year you bought your home. However, when you refinance, you must deduct points over the life of your new loan.

For example, if you paid $2,000 in points to refinance into a 15-year mortgage, your tax deduction is $2,000 divided by 15 years, or $133 per year.

Related: How to Deduct Mortgage Points When You Buy a Home

Sin #4: Misjudging the home office tax deduction

The deduction is complicated, often doesn’t amount to much of a deduction, has to be recaptured if you turn a profit when you sell your home, and can pique the IRS’s interest in your return.

But there’s good news. There’s a new simplified home office deduction option if you don’t want to claim actual costs. If you’re eligible, you can deduct $5 per square foot up to 300 feet of office space, or up to $1,500 per year.

Sin #5: Failing to repay the first-time homebuyer tax credit

If you used the original homebuyer tax credit in 2008, you must repay 1/15th of the credit over 15 years.

If you used the tax credit in 2009 or 2010 and then within 36 months you sold your house or stopped using it as your primary residence, you also have to pay back the credit.

The IRS has a tool you can use to help figure out what you owe.

Sin #6: Failing to track home-related expenses

If the IRS comes a-knockin’, don’t be scrambling to compile your records. File or scan and store home office and home improvement expense receipts and other home-related documents as you go.

Sin #7: Forgetting to keep track of capital gains

If you sold your main home last year, don’t forget to pay capital gains taxes on any profit. You can typically exclude $250,000 of any profits from taxes (or $500,000 if you’re married filing jointly).

So if your cost basis for your home is $100,000 (what you paid for it plus any improvements) and you sold it for $400,000, your capital gains are $300,000. If you’re single, you owe taxes on $50,000 of gains.

However, there are minimum time limits for holding property to take advantage of the exclusions, and other details. Consult IRS Publication 523. And high-income earners could get hit with an additional tax.

Sin #8: Filing incorrectly for energy tax credits

If you made any eligible improvements in 2014, such as installing energy-efficient windows and doors, you may be able to take a 10% tax credit (up to $500; with some systems your cap is even lower than $500). But keep in mind, it’s a lifetime credit. If you claimed the credit in any recent years, you’re done.

Installing a solar electric, solar water heater, geothermal, or small wind energy system can also make you eligible to take the Residential Energy Efficient Property Credit.

To claim the deduction, you have to use the complicated Form 5695, which can mean cross-checking with half a dozen other IRS forms. Read the instructions carefully.

Sin #9: Claiming too much for the mortgage interest tax deduction

Taxpayers are allowed to deduct mortgage interest on home acquisition debt up to $1 million, plus they can also deduct up to $100,000 in home equity debt.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

When you took out a mortgage to buy your home, did you pay points? You may be able to deduct that prepaid interest on your federal tax return — but only if you meet a long list of rules.

The points you paid when you signed a mortgage to buy your home may help cut your federal tax bill. With points, sometimes called loan origination points or discount points, you make an upfront payment to get a particular rate from the lender.

Since mortgage interest is deductible, your points may be, too.

If you itemize your deductions on Schedule A of IRS Form 1040, you may be able to deduct all your points in the year you pay them.

Some high-income taxpayers have their total itemized deductions limited, including points. You can read more about that in the instructions for Schedule A.

Lucky for you, the IRS doesn’t care whether you or the homesellers paid the points. Either way, those points are your deduction, not the sellers’.

Tip: Tax law treats home purchase mortgage points differently from refinance mortgage points. Refinance loan points get deducted over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you’re entitled to deduct $100 per year on your Schedule A.

The Fine Print for Deducting Points

The IRS rules for deducting purchase mortgage points are straightforward, but lengthy. You must meet each of these seven tests to deduct the points in the year you pay them.

1.  Your mortgage must be used to buy or build your primary residence, and the loan must be secured by that residence. Your primary home is the one you live in most of the time. As long as it has cooking equipment, a toilet, and you can sleep in it, your main residence can be a house, a trailer, or a boat.

Points paid on a second home have to be deducted over the life of your loan.

2.  Paying points must be a customary business practice in your area. And the amount can’t exceed the percentage normally charged. If most people in your area pay one or two points, you can’t pay 10 points and then deduct them.

3.  Your points have to be legitimate. You can’t have your lender label other things on your settlement statement, like appraisal fees, inspection fees, title fees, attorney fees, service fees, or property taxes as “points” and deduct them.

4.  You have to use the cash method of accounting. That’s when you report your income to the IRS as it comes in and report your expenses when you pay them. Almost everybody uses this method for tax accounting.

5.  You must pay the points directly. That is, you can’t have borrowed the funds from your lender to pay them. Any points paid by the seller are treated as being paid directly by you.

In addition, monies you pay, such as a downpayment or earnest money deposit, are considered monies out of your pocket that cover the points so long as they’re equal to or more than points.  Say you put $10,000 down and pay $1,000 in points. The downpayment exceeds the points, so your points are covered and therefore you can deduct them if you itemize. If you were to put nothing down but you paid one point, that $1,000 wouldn’t be deductible.

6.  Your points have to be calculated as a percentage of your mortgage. One point is 1% of your mortgage amount, so one point on a $100,000 mortgage is $1,000.

7.  The points have to show up on your settlement disclosure statement as “points.” They might be listed as loan origination points or discount points.

Tip: You can also fully deduct points you pay (for the year paid) on a loan to improve your main home if you meet tests one through five above.

Where to Deduct Points

Figured out that your points are deductible? Here’s how you deduct them:

Your lender will send you a Form 1098. Look in Box 2 to find the points paid for your loan.

If you don’t get a Form 1098, look on the settlement disclosure you received at closing. The points will show up on that form in the sections detailing your costs or the sellers’ costs, depending on who paid the points.

Report your points on Schedule A of IRS Form 1040.

There are two things related to points that you can’t deduct:

1.  Interest buy-downs your builder paid

Some builders put money in an escrow account (as a buyer incentive) that the lender taps each month to supplement your mortgage payment. Those aren’t considered points even though the money is used for an interest payment and it’s prepaid. You can’t deduct the money the builder put into that escrow account.

2.  Interest payments from government programs

You can’t deduct points paid by a federal, state, or local program, such as the federal Hardest Hit Fund, to help you if you’re experiencing financial trouble.

When you’re evaluating how much home you can afford, make sure you factor in the tax advantages of homeownership.

Owning a home can be a real help at tax time because it generates deductions that may reduce the income tax you owe.

Here are seven tax benefits for homeowners.

1.  The mortgage interest deduction

Every year, you can deduct the amount of mortgage interest and late charges you pay on your mortgage and home equity loans, though there are limitations. Find out more in IRS Publication 936.

If you were required to purchase private mortgage insurance (PMI) because you made a downpayment of less than 20% on your home, you can also deduct those premiums for your 2014 taxes.

2.  Deductions for home loan fees

Typically, you can deduct the prepaid interest you paid in the year you took out your mortgage loan. That includes points, loan origination fees, and loan discount fees listed on your settlement statement, even if the seller paid those fees for you.

If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.

When you refinance your mortgage to get a better rate or shorten the term of your loan, you can deduct prepaid interest fees, but you typically have to spread the deduction out over the life of your loan.

You must meet certain requirements to take the prepaid interest deductions when you purchase or refinance your home. Check with your accountant to be sure you’re following the rules.

3.  Property tax deductions

In the year you purchase your home, you’re entitled to deduct the real estate taxes you paid at the closing table. You can continue to deduct the property taxes you pay each year.

4.  Home office expenses

If you have a home office you use only for business, you may be able to claim a standard deduction of up to $1,500 per year based on $5 a square foot for up to 300 square feet. Or you can do a more complicated calculation outlined in IRS Form 8829.

The government scrutinizes home office deductions closely. Be sure you’re entitled to the deductions before claiming them.

5.  The costs of selling your home

In the year you sell your home, you can deduct the costs of selling it, including real estate commissions, title insurance, legal fees, advertising, administrative costs, and inspection fees.

You can also deduct decorating or repair costs you incur in the 90 days before you sell your home. See IRS Publication 523 for more information about the home sale deduction.

6.  The gain on your home

If you lived in your home for at least two of the previous five years before you sell it, the government lets you to take up to $250,000 of profit on the sale of your home tax free. That amount is doubled for married couples. This deduction isn’t available on rental or second homes, the IRS explains in Publication 523.

The government also allows you to subtract from your home sale profit any amounts you spend on capital improvements, such as window replacement, siding, or a kitchen remodel. Money invested for routine maintenance and repairs doesn’t count.

7.  Solar panel system tax credit

Adding solar panels to your home cuts your electricity bill, but it can also cut your federal taxes if you can take the Residential Energy Tax Credit. Breaks are also available for wind turbines and geothermal heat pump systems.

This article includes general information about tax laws and consequences, but is not intended to be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws vary by jurisdiction.

G.M. Filisko is an attorney and award-winning writer whose enjoyed the tax advantages of homeownership for more than 20 years. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.

Get an “A” on your Schedule A form: Dodge these tax deduction pitfalls to save time, money, and an IRS investigation.

Schedule A is the part of Form 1040 where you list your deductions, and the more deductions you claim, the more chances you have to misinterpret IRS rules.

To save you the heartache of having a deduction disallowed, we asked four tax experts to weigh in on the six most common home-related Schedule A mistakes taxpaying do-it-yourselfers make.

Trap #1: Line 6 – Real estate taxes
Trap #2: Line 6 – Tax calculations for recent buyers and sellers
Trap #3: Line 10 – Properly deducting points
Trap #4: Line 10 – HELOC limits
Trap #5: Line 13 – Private mortgage insurance
Trap #6: Line 20 – Casualty and theft losses

Trap #1: Line 6 – Real estate taxes

Your monthly mortgage payment often includes money that goes into your escrow account, from which the lender pays your local real estate taxes.

Your lender keeps up to a two-month payment cushion, so the money you sent the bank last year may be more than what the bank pays for your property taxes, says Julian Block, a tax attorney and author of “Julian Block’s Home Seller’s Guide to Tax Savings.”

The lender sends you a 1099 showing how much it paid for your property taxes. Use that number to avoid putting the wrong number on Schedule A.

Example:

• Your monthly payment to the lender: $2,000 for mortgage + $500 escrow for taxes

• Your annual property tax bill: $5,500

Now do the math:

• Your bank received $6,000 for real estate taxes, but only paid $5,500. It may keep the extra $500 to apply to the next tax bill or refund it to you at some point, but meanwhile, you’re making a mistake if you enter $6,000 on Schedule A.

• Instead, take the number from Form 1098 — which your bank sends you each year — that shows the actual taxes paid.

Trap #2: Line 6 – Tax calculations for recent buyers and sellers

If you bought or sold a home in the middle of the year, figuring out what to put on line 6 of your Schedule A Form is tricky.

Don’t simply enter the number from your property tax bill on line 6 as you would if you owned the house the whole year. Instead, use the property tax amount listed on your HUD-1 closing statement, says Phil Marti, a retired IRS official.

Here’s why: You only get to deduct what you actually owed in property tax. If the sellers lived in the property part of the year, they’ll give you money to pay their share of the property tax bill, but you don’t get to deduct their share, only yours.

Trap #3: Line 10 – Properly deducting points

 
You can deduct points paid on a refinance, but not all at once, says David Sands, a CPA with Buchbinder Tunick & Co LLP. Rather, you may be able to deduct them over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you may be entitled to deduct only $100 per year on your Schedule A Form.

To deduct points on a home purchase, you have to follow different rules.

Trap #4: Line 10 – HELOC limits

If you took out a home equity line of credit (HELOC), and used it for something other than improving your home, you can generally deduct the interest on it only up to $100,000 of debt each year (married filing jointly), says Matthew Lender, a CPA with Elliot Horowitz & Company.

If your HELOC was used to improve your home, you may deduct interest on lines up to $1 million ($500,000 married filing separately).

For example, if you take out a $115,000 home equity loan to pay your kids’ tuition, you can deduct the interest on the first $100,000 but not on the $15,000 that exceeds the limit. Use the same $115,000 to add a new bedroom, however, and the full amount is allowable under the $1 million cap.

Trap #5: Line 13 – Private mortgage insurance

 
You can deduct PMI on your Schedule A Form for 2014.

Since you’re thinking about it, this is also a good time to see if you have to continue paying PMI: You might be able to cancel your PMI if your home value has risen and the amount your owe on your mortgage has gone down.

Trap #6: Line 20 – Casualty and theft losses

You can deduct part or all of losses caused by theft, vandalism, fire, or similar causes, as well as corrosive drywall, but the process isn’t always obvious or simple:

• Only deduct losses that are greater than 10% of your adjusted gross income and exceed $100.

• Fill out Form 4684, which involves complex calculations for the cost basis and fair market value. When you’re done, you’ll know the amount you can deduct on line 20 of your Schedule A.

Bottom line on line 20: If you’ve got extensive losses, it’s best to consult a tax pro. “I wouldn’t do it myself, and I’ve been dealing with taxes for 40 years,” says former IRS official Marti.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

Which tax benefits do homeowners miss? Will you get audited if you take the home office deduction? Find out the answers to these questions and more before Tax Day.

There are a lot of homeownership tax benefits — if you don’t forget to take them. To make sure you get your due, HouseLogic asked tax expert Abe Schneier, a former senior technical manager with the American Institute of CPAs, for tax-filing tips.

HouseLogic: What’s the most common home-related tax deduction or credit claimed by homeowners?

Abe Schneier: The mortgage interest deduction, [which the NATIONAL ASSOCIATION OF REALTORS® estimates amounts to about $3,000 in tax savings for the average itemizing homeowner] and [the deduction for] real property taxes.

HL: Which tax provision do homeowners often overlook?

AS: You can deduct mortgage insurance premiums [or PMI] if you were required to get PMI as a condition of receiving financing on your home. Some people will overlook that, although it’s typically disclosed on the 1099 that you receive from the bank, along with all the deductible information you need.

HL note: The PMI deduction expired in 2014, but Congress may renew it for 2015 by passing a bill that extends the deduction. That’s something they’ve done in past years.

[Another area of tax-filing confusion is] whether you’ve correctly treated any points you paid if you refinanced. In a new home purchase, the points can be deducted [in the tax year you paid them]. But typically in a refinancing, you have to amortize and deduct any points you paid over the life of the mortgage, and people tend to forget that after a couple of years.

HL: What’s the No. 1 mistake homeowners make when filing their taxes?

AS: Because you receive a statement from the bank with details [such as] how much mortgage interest you paid over the year, and how much the bank pays on your behalf in real estate taxes, the number of mistakes has dropped.

But if you’re in a state where you pay the real estate taxes on your own — the bank doesn’t handle it for you — [people] make mistakes because sometimes real estate tax bills include other items besides pure real estate taxes. It could be trash collection fees; it could be snow removal fees that the state or county is assessing on the real estate tax bill. Since the items are included in the same bill, homeowners sometimes deduct [those fees] regardless of whether the items are actually taxes.

HL: What’s the single most important piece of advice for people filing their taxes as a first-time homeowner?

AS: You have to take a look at your closing statement from when you bought the house. It’s commonly called the HUD-1 form and you receive it at the closing. Occasionally, there are fees such as prepaid taxes or interest at closing that can be deductible.

HL: What tax advice do you have for someone who’s owned their home for 10 or 20 years?

AS: If you’ve been a longtime homeowner and you’ve been through refinancings, you have to be careful about how much interest you’ve deducted, especially if you have a home equity loan or equity line. A lot of people who’ve refinanced have sizable equity lines. The maximum outstanding home equity debt on which interest is deductible is $100,000; the maximum loan amount on which interest is deductible is $1 million.

HL: What home improvement-related records should homeowners keep?

AS: Absolutely keep your receipts for couple of reasons:

1. You want to make sure — if there are any warranties attached to the work that was done — that you maintain those records and you have something to go back to the person who did the work in case something doesn’t function properly.

2. If you’ve added value to the home — you’ve added a deck, you’ve added a room, you’ve added something new to house — you’ll need to know what the gain is on that capital improvement when you sell the house.

HL note: Tax rules let you add capital improvement expenses to the cost basis of your home, and a higher cost basis lowers the total profit or capital gain you’re required to pay taxes on. Of course, most homeowners are exempted from taxes on the first $500,000 in profit for joint filers ($250,000 for single filers). So it doesn’t apply to too many people.

HL: How do I tell the difference between a capital improvement and a repair?

AS: Typically a repair is [done] to allow an item, like a home furnace or air conditioner, to continue. But if you were to replace the heating unit, that’s not a repair.

HL: Does taking any home-related tax benefits, such as the home office deduction, make a taxpayer more likely to be audited?

AS: Only if numbers look out of the ordinary — for instance, if one year you were writing off $20,000 in mortgage interest debt and the next year you’re writing off $100,000 in mortgage interest. Taking the home office deduction in and of itself doesn’t usually generate an audit. However, if you claim nominal income and significantly higher expenses in an effort to create artificial losses, the IRS will see that there’s something else going on there.

HL: Once filing season is over, when should homeowners start thinking about next year’s taxes?

AS: Well, hopefully, when you visit your CPA to give information about or pick up [this year’s] tax return, your CPA has spoken with you about your plans for [next year]:

• If any major improvements are scheduled

• If you’re planning on moving

• How to organize any expenditures for fixing up the home before sale

If you’re planning to do any of those things, talk with your CPA so that you’re prepared with documentation and so that the [tax pro] can help minimize your tax situation.

From mortgage interest to property tax deductions, here are the tax tips you need to get a jump on your returns.

Owning a home can pay off at tax time.

Take advantage of these homeownership-related tax deductions and strategies to lower your tax bill:

Mortgage Interest Deduction

One of the neatest deductions itemizing homeowners can take advantage of is the mortgage interest deduction, which you claim on Schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home — and your home can be a house, trailer, or boat, as long as you can sleep in it, cook in it, and it has a toilet.

Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or improve your home.

If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit.

If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.

PMI and FHA Mortgage Insurance Premiums

You can deduct the cost of private mortgage insurance (PMI) as mortgage interest on Schedule A if you itemize your return. The change only applies to loans taken out in 2007 or later.

By the way, the 2014 tax season is the last for which you can claim this deduction unless Congress renews it for 2015, which may happen, but is uncertain.

What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized downpayment (usually 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).

If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that your adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return). So, if you make $110,000 or more, you can’t claim the deduction (10% x 10 = 100%).

Besides private mortgage insurance, there’s government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing, and deducting them is complicated. A tax adviser or tax software program can help you calculate this deduction. Also, the rules vary between the agencies.

Prepaid Interest Deduction

Prepaid interest (or points) you paid when you took out your mortgage is generally 100% deductible in the year you paid it along with other mortgage interest.

If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.

But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the life of your mortgage. Say you refi into a 10-year mortgage and pay $3,000 in points. You can deduct $300 per year for 10 years.

So what happens if you refi again down the road?

Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the life of the loan.

Home mortgage interest and points are reported on Schedule A of IRS Form 1040.

Your lender will send you a Form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the HUD-1 settlement sheet you got when you closed the purchase of your home or your refinance closing.

Property Tax Deduction

You can deduct on Schedule A the real estate property taxes you pay. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.

If you bought a house this year, check your HUD-1 settlement statement to see if you paid any property taxes when you closed the purchase of your house. Those taxes are deductible on Schedule A, too.

Energy-Efficiency Upgrades

If you made your home more energy efficient in 2014, you might qualify for the residential energy tax credit.

Tax credits are especially valuable because they let you offset what you owe the IRS dollar for dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades.

The credit carries a lifetime cap of $500 (less for some products), so if you’ve used it in years past, you’ll have to subtract prior tax credits from that $500 limit. Lucky for you, there’s no cap on how much you’ll save on utility bills thanks to your energy-efficiency upgrades.

Among the upgrades that might qualify for the credit:

• Biomass stoves

• Heating, ventilation, and air conditioning

• Insulation

• Roofs (metal and asphalt)

• Water heaters (non-solar)

• Windows, doors, and skylights

To claim the credit, file IRS Form 5695 with your return.

Vacation Home Tax Deductions

The rules on tax deductions for vacation homes are complicated. Do yourself a favor and keep good records about how and when you use your vacation home.

• If you’re the only one using your vacation home (you don’t rent it out for more than 14 days a year), you deduct mortgage interest and real estate taxes on Schedule A.

• Rent your vacation home out for more than 14 days and use it yourself fewer than 15 days (or 10% of total rental days, whichever is greater), and it’s treated like a rental property. Your expenses are deducted on Schedule E.

• Rent your home for part of the year and use it yourself for more than the greater of 14 days or 10% of the days you rent it and you have to keep track of income, expenses, and allocate them based on how often you used and how often you rented the house.

Homebuyer Tax Credit

This isn’t a deduction, but it’s important to keep track of if you claimed it in 2008.

There were federal first-time homebuyer tax credits in 2008, 2009, and 2010.

If you claimed the homebuyer tax credit for a purchase made after April 8, 2008, and before Jan. 1, 2009, you must repay 1/15th of the credit over 15 years, with no interest.

The IRS has a tool you can use to help figure out what you owe each year until it’s paid off. Or if the home stops being your main home, you may need to add the remaining unpaid credit amount to your income tax on your next tax return.

Generally, you don’t have to pay back the credit if you bought your home in 2009, 2010, or early 2011. The exception: You have to repay the full credit amount if you sold your house or stopped using it as primary residence within 36 months of the purchase date. Then you must repay it with your tax return for the year the home stopped being your principal residence.

The repayment rules are less rigorous for uniformed service members, Foreign Service workers, and intelligence community workers who got sent on extended duty at least 50 miles from their principal residence.

Related: A Homeowner’s Guide to Taxes

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.

Deducting mortgage interest, as well as interest on home equity loans and HELOCs, can save money on taxes.

Deducting mortgage interest is a great tax benefit that can make home ownership more affordable. Your first mortgage isn’t the only loan that qualifies, either. In many cases, you can also deduct interest on home equity loans, second mortgages, and home equity lines of credit, or HELOCs.

You need to itemize your return to reap the benefits of these deductions. Calculations can be complicated, so consult a tax adviser.

Know your loan limits

A good place to check out what you can deduct before you borrow is the chart on page 3 of IRS Publication 936. It’ll walk you through the requirements you must meet to deduct all of your home loan interest.

The first hurdle you’ll run into is the total amount of your loan or loans. In general, individuals and couples filing jointly can deduct interest on loans up to $1 million ($500,000 if you’re married and filing separately). The money must have been used for acquisition costs — that is the cost to buy, build, or substantially improve a home, explains Scott O’Sullivan, a certified public accountant with Margolin, Winer & Evens in Garden City, N.Y. Any interest paid on loan amounts above the $1 million threshold isn’t deductible.

The same $1 million limit applies whether you have one home or two. Buying a vacation home doesn’t double your loan limits. And two homes is the max; you can’t deduct a mortgage for a third home. If you have a mortgage you took out before Oct. 13, 1987, you have fewer restrictions on claiming a full deduction. The calculations for “grandfathered debt” can get complex, so get help from a tax professional or refer to IRS Publication 936.

Whatever you do, don’t forget that you can also deduct the points and fees associated with a first or second mortgage when you initially buy your home, says Jeff Rattiner, a CPA with JR Financial Group in Centennial, Colo. If you refinance the same house, you have to deduct those costs over the entire term of the loan. If you refinance again, you can deduct all the costs from the earlier refi in the year you take out the new loan.

Spend loan proceeds wisely

The other limitation comes into play when you take out a home equity loan or HELOC, even if you don’t use the proceeds to buy, build, or improve your home. In that case, you can deduct interest on up to $100,000 ($50,000 if married filing separately) on outstanding home equity debt. This loan limit also applies in a cash-out refi, in which you refinance and take out part of the equity you’ve built up as cash, says John R. Lieberman, a CPA with Perelson Weiner in New York City.

That means if you decide to take out a $115,000 home equity loan to buy that Porsche, you can deduct the interest on the first $100,000 but not on the $15,000 that exceeds the limit. Use the same $115,000 to add a new bedroom, however, and the full amount is allowable under the $1 million cap. Keep in mind, though, that the $115,000 gets added into the pot of whatever else you owe on your other home loans. In many cases, points and loan origination costs for HELOCs are deductible.

Consider this simplified scenario: You borrow $250,000 against your home at 8% interest. That means you’ll pay $20,000 in interest the first year. Spend the $250,000 on home improvements, and all of the interest is deductible. Spend $150,000 on improvements and $100,000 on your kids’ college tuition, and all the interest is still deductible.

But spend $100,000 on improvements and $150,000 on tuition, and the improvement outlays are deductible, though $50,000 of the tuition expense isn’t. That’ll cost you $4,000 in interest deductions. Preserve the $4,000 deduction by coming up with the extra money for tuition from another source, perhaps a low-interest student loan or by borrowing from a retirement plan. For someone in a 25% bracket, a $4,000 deduction lowers taxes by $1,000, plus applicable state income taxes.

Beware the dreaded AMT

Even if you’ve followed all the loan limit rules, you can still get stuck paying tax on mortgage interest. How come? It’s all thanks to the Alternative Minimum Tax. Congress created the AMT, which limits or eliminates many deductions, as a way to keep the wealthy from dodging their fair share of taxes.

Calculating the AMT can be complex, but if you make more than $75,000 and have several kids or other deductions, you might well be subject to it. Problem is, if you fall into the AMT group, you may not be able to deduct interest on a home equity loan, even if the loan falls within the $1 million/$100,000 limit. If you’re subject to the AMT and borrow money against the value of your home, you’ll have to use it to buy, build, or improve your place, or you may not have a chance to deduct the interest, says Rattiner, the Colorado CPA.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

If you can accept tradeoffs, real estate makes a great retirement plan: Put a rental property into an IRA, play by IRS rules, and grow your investment tax-free until retirement.

When you put a rental property (a house, condo, land, or even commercial property) in an IRA, you don’t owe taxes on the income it earns while your retirement account grows. Here’s how it works:

• You use $100,000 that’s already in an IRA account to buy a rental home. (In this example, we’re assuming for simplicity this is the full price. You can get a mortgage for real estate inside an IRA, but there are special rules. More on that later.)

• The rent is $500 a month. Every year, your investment property earns $6,000 less expenses of $3,000, netting you $3,000 per year.

• You keep that $3,000 inside your real estate IRA each year. Prudent, conventional investments allow it to grow at about 3% a year.

• In 20 years, you turn 59½ and can start taking money out of your IRA.

• You’ll have about $82,000 in your investment account (compounding $250 per month for 20 years) and the house will be worth about $180,000 (assuming home prices rise 3% a year and you never raise the rent).

Pretty sweet.

3 IRA Real Estate Rules of Thumb

Just like a traditional IRA, you have to follow the IRS rules about what you can and can’t do with it. Since it’s easier to accidentally break the rules than if you just have stocks or mutual funds, and the IRS hasn’t given a lot of guidance, work with a qualified financial adviser, CPA, or attorney who specializes in tax issues.

As you sift through the details, keep three rules of thumb in mind and you’ll be fine:

1. Everything in the IRA stays in the IRA. The real estate, and any income it generates, stays inside the IRA — at least until you turn 59½, when you can legally start taking out money.

2. Everything outside the IRA stays outside the IRA. No money from accounts other than this IRA can be used to buy or improve IRA-held real estate, or pay the property’s mortgages, taxes, and insurance.

3. You’re always one step removed from your IRA real estate. You can’t live in it. Do it and the IRS says, “Hey, you’re enjoying your retirement account before you retire.” That’s like pulling cash out of your IRA before you reach the magic age of 59½. And that means penalties. Also, only non-related contractors can work on it, and they must be paid with IRA cash. Likewise, if you sell the property before you turn 59½, keep the money in the IRA or you’ll pay penalties and taxes for early withdrawal.

The Downsides

1. Say good-bye to typical home tax deductions. Your house is already inside a tax-advantaged account, so you don’t get to deduct the mortgage interest or other expenses. If you pay cash for the property, that’s no big deal. But if you have a mortgage, mortgage interest is a big deduction to lose.

2. What if your property doesn’t generate a profit every year — perhaps the tenant is late on payments or the property is vacant for periods of time? You’ll need a cushion in your account to draw on.

3. You can’t deduct losses, such as from storms, because the property is in an IRA. Similarly, if the property is sold for a loss, you can’t deduct that. And when you take money out of the real estate IRA, it’s taxed as income. But when you own the property outright and sell it, the profit comes under the rules for cap gains, which means your profit is likely excluded from tax.

More Fine Print

Get a custodian. The companies that run typical IRAs avoid exotica like real estate. You’ll need a specialized company to help run a “self-directed” IRA where you put your rental property. Self-directed means you take more responsibility for your investment than you would typically. Here are a few custodians that let you expand into self-directed options like real estate, in addition to typical IRA investments.

• Equity Trust

• Pensco

• Provident

• Sterling

The self-directed IRA isn’t a different animal, really. All the advantages and rules of a traditional IRA apply. And since you’ll need IRA cash to manage your IRA real estate, it’s much simpler (although not legally mandatory) for you to have all IRA holdings — real estate, money market, stocks, mutual funds — with one custodian in a single self-directed account.

Costs are comparable to a traditional IRA, but as with any investments, fees can vary, as can charges for services. It pays to shop around — ask potential custodians for free breakdowns.

Pay for upkeep out of the real estate IRA.

Repairs: If your rental isn’t making enough money to cover repair costs like leaky faucets or broken furnaces, tough luck. You can’t pay for the repairs out of your own pocket.

Upgrades: A DIY upgrade is verboten because you’re contributing something of value (your labor) to the IRA, says Kevin Worthley, a financial planner who specializes in retirement planning. Still, if you personally fix a faulty electrical outlet, for example, you could argue that you aren’t adding to the house’s value, merely maintaining it, so that should pass muster with the IRS.

So does that mean you can never fix up your IRA house? You can turn it into a palace if you want — but you can’t do it yourself. Hire contractors, and pay all their fees from inside the IRA. If you have $1 million inside your IRA, go right ahead and buy a $500,000 house and spend $250,000 to improve it, leaving yourself a plentiful cushion. But you can’t spend one dime out of your regular income or personally do anything more elaborate than change a washer in the faucet.

Solution: Keep a cash cushion in your real estate IRA to cover unexpected repairs and vacancies. How much? Think of what you do for your primary residence and match it for your rental. Make a list of the costs of your rental taxes, mortgage, and upkeep if you have to go for an extended period without a tenant.

Get a special real estate IRA mortgage. If you’re not planning to buy a rental property outright with existing IRA funds, you’ll need a non-recourse loan. That literally means the bank has no (or virtually no) recourse if you default. If you stop making payments on a non-recourse loan because your IRA runs out of cash, the bank can’t force you to pay the mortgage with non-IRA money. (That would break the law by commingling regular funds with IRA funds.)

Since a non-recourse loan is a bigger risk for a bank, it will want a 30% or larger down payment (from your IRA account, not your personal bank account), and you’re going to pay a higher interest rate by several points than you would for your regular home loan.

Other than that, the mortgage works like any other:

• Instruct your custodian to draw checks from cash inside your IRA to the bank.

• Or have the custodian set up a regular electronic transfer. The custodian will also do this for real estate taxes and insurance.

As long as the IRS sees that all home-related payments come out of the IRA account, you’re fine.

So What Happens When I Retire?

At 70½, you must start taking a certain minimum out of your IRA regularly, so you need enough cash on hand to pay yourself. Make sure you have this cushion well before you hit 70½. You can also sell the IRA house and put the cash into a more liquid investment.

Here’s another option: When you turn 59½, you can legally take your house out of your IRA. The investment that generated tax-free income all these years is now your cozy retirement cottage. Of course, you have to pay income tax on the home’s value, but if you sold your primary house, you now have the cash to do that, so you’re set for your golden years.

Or, at 59 1/2 you can create a series of deeds that gradually transfer your house to you personally while leaving some of it in your IRA, before you actually move in. This stretches out your income tax liabilities because you’re basically taking only a piece of your house out of the IRA each year. You need a lawyer and title company to do this, but if you want to avoid a large tax bill in your first residence year, it’s worth it.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.