By Garrett Lund
With April approaching, San Diegans will meet with their accountants and claim tax deductions to secure the most advantageous tax rates. Homeowners receive a wide array of advantages when claiming deductions, because the U.S. tax code offers incentives and tax breaks to promote home ownership. Whether your house is paid for or has a mortgage, you have several options that may reduce your taxes, including opportunities as a California resident.
1. Mortgage Interest Paid
The mortgage interest deduction represents the largest single tax break available to homeowners. With the typical mortgage amortization schedule, the mortgage interest is front-loaded. This means that interest paid on a 30-year loan will surpass the annual principal payments through the tenth year of the loan. Therefore, early in the term of a mortgage, your interest deductions will be quite significant. In addition, interest from refinancing, second mortgages, home equity lines of credit and home equity loans may be deductible as well.
2. Discount Points
This one-time charge happens at closing, and it gives the borrower access to interest rates that are currently below the market rates. Generally, the IRS treats these discount points as prepaid mortgage interest, which may make them tax deductible. Frequently, when the borrower pays the points in conjunction with the purchase of a home, the deduction may be taken in full.
3. Property Taxes
As a homeowner, any taxes that you pay to state or local agencies and municipalities may be deductible in the year in which you paid them.
4. Home Improvements
Some categories of home improvements may be tax deductible. For example, modifications made to your home to accommodate a medical impairment may be up to 100 percent tax deductible. Improvements made for aesthetic reasons are not tax deductible. However, the costs may be used to reduce the profit you make from selling your home.
5. Home Businesses
When you use a portion of your home as an office or work space, you may be able to deduct the cost of maintaining that space. This includes expenses related to adding separate phone and cable lines, renovations and utilities.
6. Selling Costs
When you sell your home, you have several potential tax deductions, including title insurance, agent commission, advertising costs, legal fees, administrative costs, inspection fees and escrow fees.
7. California Residents: Propositions 60 and 90
If you have ownership in north county real estate, chances are you have heard of Propositions 60 and 90. These two constitutional amendments in California give property tax relief for homeowners who are aged 55 and above. They allow the senior citizen to transfer their prior property tax base to their new home, which must be of equal or lesser value. Currently, eight counties participate in this program, and this includes San Diego. Proposition 60 provides this relief when both properties are within one county. Proposition 90 provides the relief when the sold property is in one participating county, and the new home is in another of the eight counties.
If you have any questions about whether you qualify to take these deductions, please consult with a tax accountant or tax attorney. This article is not legal tax advice.