12-22-2017 10:30 am
We have all been hearing about the new tax plan. But, did you know that it will not affect your taxes for 2017? This article by Homes.com was published just before the tax plan was signed by Congress, but is a great reminder of tips and deductions you can still use when you file taxes.
As 2017 draws to a close, Congress is considering important changes in federal income taxes. Several of these have significant implications for homeowners, especially changes in the deductibility of mortgage interest and property taxes. However, most of the changes under consideration in Congress will impact 2018 taxes, not 2017 taxes. So for 2017 taxes, homeowners should plan to comply with the tax code in effect before the reform.
It’s a good idea to review where you stand on your 2017 taxes before the year ends, especially provisions that impact homeowners. Take some time to make sure your documentation is in order. There are issues in the existing tax code that are important to most homeowners. The first two deductions, mortgage interest and property taxes, may be changed by the tax reform legislation and will apply to 2018 income.
Mortgage Interest Deduction
Homeowners can deduct the interest they pay on their mortgage for their principal residence. After the end of the year, your lender will provide you a breakdown of the interest and the principle that you paid during the year. Mortgages are structured so that homeowners pay more interest than principal during the first half of the year, so if you are a first-time homeowner and you bought your home early in 2017, your interest could be substantial.
Did you buy a home this year?
You can only deduct the amount of interest you paid on your home in the calendar year 2017 if you purchased a home this year. You can also deduct any points that you paid for your mortgage.
Did you buy a vacation or second home this year?
You can also deduct the mortgage interest you paid for mortgages on other residences you own, such as a vacation home. However, if you rented the property for two weeks or more, you cannot deduct the mortgage interest you paid for the period you owned the home. Your rental income from any residence you own is treated differently, and you also can subtract any of the expenses you paid to rent out your vacation home from your rental income. For more information on vacation and second homes, check out the IRS’ Tax Topic 415 and Publication 527. Be sure that you have receipts for rental expenses, including utilities.
State and Local Property Taxes
You can also deduct the amount of property taxes you paid in 2017 on your principal residence and other homes that you own. These taxes are based on the assessment of your property, and they are usually paid twice a year. If your mortgage company pays your property taxes for you, you will receive an accounting of how much you spent in 2017. If you pay your property taxes directly, be sure you have copies of the checks you wrote. For more information on property taxes, refer to IRS Publication 503.
Mortgage Insurance and Short Sales
Since 2007, homeowners have been able to deduct their mortgage insurance premiums as mortgage interest. The exemption for mortgage insurance was never made a permanent part of the tax code but was renewed on a yearly basis by Congress. It was not renewed for 2017, so mortgage insurance premiums cannot be deducted from 2017 taxes. A similar law that allowed homeowners whose lenders canceled all or part of their mortgage via a “short sale” to not pay taxes on that amount also was not renewed. So if you sold your home using a short sale in 2017, you would have to pay taxes on the amount that your lender forgave. For more information, see “Five Tax Breaks that will Disappear in 2017”.
Buying a Home in 2017
If you bought a home during 2017, review your Closing Disclosure Form you received just before closing. All interest and tax payments, including recordation or other state or local taxes that you paid at closing, will be listed on the second page. You can deduct prepaid interest and all state and local taxes.
Selling a Home in 2017 and Capital Gains Tax
After your closing or at the end of the year, you should receive a statement from your lender on how much interest and property tax you paid when you paid off your mortgage with the proceeds from the sale. You can also deduct any taxes you paid. Check your closing documents to confirm. If you sold your principal residence in 2017, you would be exempt from paying capital gains taxes on the first $250,000 of gain, or $500,000 if married and filing jointly. To qualify, you must live in the home for two of the preceding five years before you sold to qualify you will not have to pay. Second homes and investment properties do not qualify for this exemption. To calculate your gain, subtract your basis price from your selling price. Your basis amount is the price you paid for the house plus capital improvement you made to the property such as adding a room or a deck. Be sure to keep receipts for improvement you have made every year so that you can add your expenditures for improvements from your buying price to help you avoid the exemption ceiling. for more information on capital gains taxes and home sales.
Home Office Deduction
You can reduce your adjusted gross income and pay fewer taxes by subtracting the cost of maintaining the portion of your home used as an office. Special rules apply. You cannot use the space used as your office for any other purpose. You may only include a percentage of your expenses represented by the size of your office, and more. See Home Office Deduction: a Tax Break for Those Who Work From Home from the IRS.
Before the year ends, make sure you have the documentation you will need to claim the tax exemptions and deductions to which you are entitled.
Create a file to keep receipts from home improvements every year in case you will need to increase your base amount to avoid paying capital gains taxes when you sell your home.
Pay close attention to the details of tax reform legislation because it may impact the mortgage interest and property tax deductions for 2018. That way, you can plan accordingly in the year to come.
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