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As real estate agents, we understand that buying or selling a home is a significant milestone. It’s exciting, but it also comes with its fair share of responsibilities, including preparing your tax returns. If you purchased or sold a house last year, here are some tips to help you navigate your Federal and Virginia state tax returns and maximize your deductions.
Possible Deductions for Homebuyers
If you were a first-time buyer, you may want to review this IRS Guide, “Know What’s Deductible After Buying That First Home, Sweet Home”.
If you purchased a home last year, whether your first home or not, you might be eligible for several deductions:
Mortgage Interest
As mentioned earlier, you can deduct the interest paid on your mortgage.
Mortgage Insurance Premiums
If you paid mortgage insurance premiums, you might be able to deduct them, subject to income limitations.
Points Paid on a Mortgage
Points paid to lower your mortgage interest rate can be deducted in the year they were paid if they meet certain criteria.
Possible Deductions for Home Sellers
You may be wondering if there are tax deductions when selling a home. According to the IRS, there are several Tax Considerations When Selling a Home. Let’s take a look at a few (Here are 5 Tax Deductions to Take When Selling a Home):
Selling costs
These deductions are allowed as long as they are directly tied to the sale of the home. There are, of course, several caveats.
Home improvements and repairs
If you renovated a few rooms to make your home more marketable (and so you could fetch a higher sales price), you can deduct those upgrade costs as well. This includes painting the house or repairing the roof or water heater.
Property taxes
You can deduct the amount you paid in property taxes last year up to $10,000.
Mortgage interest
As with property taxes, you can deduct the interest on your mortgage for the portion of the year you owned your home. Just remember that under the 2017 tax code, new homeowners (and home sellers) can deduct the interest on up to only $750,000 of mortgage debt, with restrictions.
Capital gains tax
The capital gains rule isn’t technically a deduction (it’s an exclusion), but you’re still going to like it.
Preparing Your Federal Tax Return
When it comes to your federal tax return, there are several key forms and deductions to be aware of:
Form 1099-S
If you sold a home, you should receive Form 1099-S, which reports the proceeds from real estate transactions. This form is crucial for reporting the sale on your tax return.
Mortgage Interest Deduction
Homeowners can deduct mortgage interest on loans up to $750,000 (or $1 million if the mortgage was taken out before December 15, 2017). This deduction can significantly reduce your taxable income.
Property Tax Deduction
You can deduct state and local property taxes, but keep in mind that the total deduction for state and local taxes is capped at $10,000.
Capital Gains Exclusion
If you sold your primary residence, you might be able to exclude up to $250,000 of the gain from your income ($500,000 for married couples filing jointly), provided you meet the ownership and use tests.
Selling Costs
Costs directly associated with selling your home, such as legal fees, real estate agent commissions, and advertising costs, can be deducted from the sales price, reducing your capital gains.
Preparing Your Virginia State Tax Return
Virginia has its own set of rules and deductions for homeowners.
Capital Gains Tax
Virginia taxes capital gains at the same rate as ordinary income, which ranges from 2% to 5.75% depending on your income bracket.
Property Tax
Property taxes in Virginia are administered at the local level, so rates and due dates can vary. Be sure to check with your local tax office for specific information.
Mortgage Interest and Property Tax Deductions
Similar to federal tax rules, you can deduct mortgage interest and property taxes on your Virginia state tax return, subject to the same limitations.
Final Tips
Keep Good Records
Maintain detailed records of all your home-related expenses, including closing statements, mortgage statements, and receipts for home improvements.
Consult a Tax Professional
Tax laws can be complex, and a tax professional can help ensure you’re taking advantage of all available deductions and credits.
Navigating tax returns can be daunting, but with the right information and preparation, you can make the process smoother and potentially save money.
We hope this guide helps you feel more confident as you prepare your tax returns. Remember, every homeowner’s situation is unique, so it’s always a good idea to consult with a tax professional to address your specific circumstances.
If you have any questions or need further assistance, feel free to reach out.
Always remember, we’re here for you!
Dave & JoAnne Adams, REALTORS®
703-963-4491
© 2024 Dave and JoAnne Adams
