Tax Tips & Calculators

Buying a home is a great way to reduce your income tax. The qualified mortgage interest you pay and your real estate taxes are both tax deductible.

New for Tax Year 2009

Refundable First-time Homebuyer Credit. Individuals who purchase a principal residence from an unrelated party at fair market value before May 1, 2010, and who did not own a principal residence during the 3-year period ending on the date of purchase may claim a refundable tax credit for 10% of the purchase price. The maximum credit is $8,000 ($4,000 Married Filing Separately).

In addition, individuals who purchase a home after Nov. 6, 2009, and who owned a home they used as their main home for at least 5 consecutive years during the 8-year period ending on the date they purchase a subsequent residence may now claim the credit. The credit for these individuals is equal to 10% of the purchase price with a maximum credit of $6,500 ($3,250 Married Filing Separately).

A home purchased under a written binding contract entered into by April 30, 2010, qualifies for the credit if the closing of the purchase occurs before July 1, 2010.

Members of the Armed Forces, the Foreign Service, and the intelligence community serving on qualified official extended duty outside the United States for at least 90 days during the period from Jan. 1, 2009, through April 30, 2010, can claim the credit for a home purchased before May 1, 2011 (before July 1, 2011, for a home purchased under a written binding contract entered into by April 30, 2011, if the closing of the purchase occurs before July 1, 2011.) In addition, the recapture requirement is waived for all members of the Armed Forces, the Foreign Service and the intelligence community serving on qualified official extended duty for at least 90 days, regardless of where they are stationed, who sell their homes after 2009 in connection with government orders.

For homes purchased before Nov. 7, 2009, the credit is reduced when modified adjusted gross income (AGI) exceeds $75,000 ($150,000 if Married Filing Jointly) and is eliminated when modified AGI reaches $95,000 ($190,000 if Married Filing Jointly).

For homes purchased after Nov. 6, 2009, the credit is reduced when modified adjusted gross income (AGI) exceeds $125,000 ($225,000 if Married Filing Jointly) and is eliminated when modified AGI reaches $145,000 ($245,000 if Married Filing Jointly).

For homes purchased after Nov. 6, 2009, no credit is allowed

1. if the purchase price exceeds $800,000
2. for a home purchased by an individual who is eligible to be claimed as a dependent by another taxpayer
3. for a purchaser who is less than 18 years of age. A married taxpayer is treated as meeting the age requirement if either the taxpayer or the taxpayer's spouse is at least age 18 on the date of purchase.

For credits claimed on a 2009 or 2010 return, you must attach to your return a properly executed copy of the settlement statement used to complete the purchase.

The extended credit must be repaid if the home is sold or ceases to be your personal residence within 36 months of the purchase, unless an exception applies.

For homes purchased in 2009 or 2010, individuals may claim the credit on the return for the year in which the residence is purchased or on an amended return for the year before that year.

Additional Standard Deduction

Nonitemizers may claim an additional standard tax deduction for state and local real property taxes. The maximum additional tax deduction is $500 ($1,000 on a joint return). Complete Schedule L (Form 1040) to claim the deduction.

Itemize Tax Deductions

When you purchase a home, you're more likely to be able to itemize tax deductions on Schedule A. The following are more common itemized tax deductions not related to your home:

• medical and dental expenses
• state and local income tax or sales tax
• sales tax on a new car purchased after Feb. 16, 2009, even if you choose to deduct state income tax
• personal property taxes (usually on your car)
• gifts of cash and property to qualified religious and charitable organizations
• casualty and theft losses
• tax preparation fees
• investment expenses

Some of these tax deductions are subject to limitations, so follow the instructions for Schedule A carefully.

Claim the Mortgage Interest Tax Deduction

Mortgage interest you pay on loans up to $1 million ($500,000 Married Filing Separately) is tax deductible, provided you used the money to buy, build or improve your home and the loan is secured by your home.

Plus, the interest you pay on loans secured by your home and used for a purpose other than to buy, build or improve your home is tax deductible for loans up to $100,000 ($50,000 Married Filing Separately). The limit may be reduced depending on the market value of the home at the time you take out the loan. Use equity lines of credit wisely. If you fail to make the payments, you put your home at risk.

If your income meets the requirements and your state or local government issued you a mortgage certificate credit, you may be eligible to claim a tax credit (the mortgage interest tax credit) based on the amount of interest you paid. If you claim the tax credit, you must reduce your interest deduction by the amount of the credit.

Deduct Loan Origination Fees

Finally, don't forget about points, also called loan origination fees. One point equals 1% of your loan. Points you pay (and even points the seller pays) when you purchase your home are generally tax deductible in full the year you pay them.

Alternatively, you may choose to amortize the points over the term of your mortgage. This choice is usually made only when your itemized deductions are less than the standard deduction for the year you bought the home.

Points paid to refinance a loan must be deducted over the term of the loan. If you deduct points over the term of the loan and sell the home or refinance it again before the loan expires, you can deduct in the year of the sale or refinancing any points that you didn't previously deduct. Find an H&R Block office near you and let an H&R Block tax professional help you understand the rules.

Mortgage Insurance Premiums

If you took out a first mortgage in 2007, 2008 or 2009, you may be able to deduct qualified mortgage insurance premiums you pay in connection with the loan. Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Home Protection Act of 1998 as in effect Dec. 20, 2006). Prepaid mortgage insurance premiums generally must be deducted over the period to which they apply.

Gain on the Sale of Your Home

When you sell your home, the IRS allows you to exclude gain on the sale from taxable income, up to $250,000 ($500,000 Married Filing Jointly and you both meet the use requirement).

You can claim the exclusion if you own and use the home as your main home for at least 2 years during the 5-year period ending on the date of sale. You may claim this exclusion only once in any 2-year period.

If you don't meet the 2-year requirement, you may be eligible to claim a reduced exclusion if you sell your home because of an "unforeseen circumstance," such as a change in employment or a divorce. A loss on the sale of your home, however, isn't tax deductible.

If you used the home other than as your residence after 2008 (for example, as rental property), gain allocable to that use (nonqualified use) generally can't be excluded. This rule does not apply to:

• Any nonqualified use before 2009.
• Any period during the 5-year period that is after the last period of use as a principal residence.
• A period of temporary absence of up to 2 years for reasons of health, employment and unforeseen circumstances.
• Any period (not to exceed 10 years) during which the taxpayer or spouse was serving on qualified official extended duty.