As the real estate crash destroys property values across the country, it's easy to lose sight of one of the most appealing features of owning a home: tax savings. Uncle Sam has long used the tax code to promote home ownership. And although real estate prices are plummeting, those tax savings remain as lucrative as ever. While some of these benefits are well known--such as the mortgage interest deduction--others are less intuitive. At the same time, recently enacted legislation has introduced new opportunities for tax savings. Here are five easy-to-overlook, housing-related tax breaks you'll want to remember this April 15th:
1. First-time home buyer tax credit: President Barack Obama's $787 billion economic stimulus package--which became law in mid February--included a tax credit designed to ramp up housing demand. The new law offers eligible first-time home buyers a tax credit worth up to $8,000 when they purchase a principal residence on or after Jan. 1, 2009 and before Dec. 1, 2009. "It's not a huge amount of money, but neither is it trivial," says Mike Larson of Weiss Research. The credit does not have to be paid back, but it's subject to income limitations. Under the terms of the legislation, a first-time home buyer is defined as anyone who has not had an ownership interest in a principal residence for three years before the transaction.
[Check out New Home Buyer Tax Credit: 7 Things You Need to Know.]
2. Property tax deduction for non-itemizers: A housing law enacted in July provided a perk for home owners who don't itemize their taxes. The move enables such taxpayers to claim an extra deduction in addition to the standard deduction for tax year 2008. Under the terms of the legislation, non-itemizing homeowners can deduct up to $500 of property taxes if they are filing individually, or up to $1,000 if they are filing jointly. "That will have a direct, dollar-for-dollar impact on some folks," says Linda Goold, the director of federal tax programs for the National Association of Realtors.
3. Energy efficient home improvements: The financial bailout package, which became law in October, expanded the scope of home improvements eligible for tax credits in 2008. The legislation enabled homeowners who had certain wind energy systems in place last year to qualify for tax credits worth 30 percent of the purchase and instillation cost, up to a maximum of $4,000. It also boosted the size of the tax credit available for installing geothermal heat pumps. In addition, home owners can qualify for similar credits on their 2008 taxes if they installed solar water heaters, fuel cells, or solar panels last year. While the savings for these energy efficient home improvements are limited for 2008, the recently-enacted economic stimulus package increased the benefits going forward. "For 2009, it's much broader," says Karen Schneider of Energy Star, an Environmental Protection Agency and Department of Energy joint program.
[Check out Mortgage Rates to Fall Further: 7 Things to Know.]
4. Home office tax deduction: Homeowners who work from home may be eligible for additional tax savings. The Internal Revenue Service allows certain property owners who use a part of their home to conduct business to claim a home office deduction. In order to qualify, a portion of the house--say, a room--must be used exclusively and regularly as a principal place of business or as a location to interact with customers. A room that is regularly used for some types of storage, as a day care facility, or as rental property may qualify as well. The value of the deduction will depend on the size of the space used. But those considering claiming this deduction should proceed with caution, as IRS auditors are on the lookout for its abuse. To avoid problems, homeowners that claim the home office deduction "need to keep very careful records and to make an assessment of factually why they think they are justified [in taking it]," Goold says.