There is a plus side to everything! The plus side to spending more time at home during the Covid-19 pandemic is you have plenty of time to work on your taxes…. I didn’t say it would be fun! And if you were lucky enough to buy or sell a New River Valley Home in 2020 there are a number of tax deductions you will want to take advantage of.
First, let’s understand what a tax deduction is. A tax deduction reduces the amount of taxable income you owe taxes on. You have two options when taking tax deductions. You can either take a standard deduction or itemize your deductions.
The 2021 standard deduction for a married couple filing jointly is $25,100. The head of household standard deduction is $18,800. And the standard deduction for a single person or a married person filing separately is $12,550.
Your other option is to itemize your deductions by adding up your deductible expenses to figure out what you can deduct from your taxable income. This is a bit more time consuming and complicated than taking the standard deduction but depending on your individual situation this may save you hundreds of dollars.
The real estate tax deductions below will only apply if you itemize your deductions.
Mortgage Interest Deduction
The interest you paid on your mortgage in 2020 is tax deductible up to $750,000. This deduction can only be taken on your primary residence, not on investment property or a second home.
Your mortgage company is required to provide you with a Mortgage Interest Statement showing the interest you paid throughout the year. The deadline for providing this statement was February 1. If you haven’t received your Mortgage Interest Statement in the mail, check your lender’s website. Often, this document is uploaded there rather than being mailed to you. If you don’t find it there, you may want to call your lender ask for your statement.
If you are a home buyer and your mortgage was sold to a third party after closing, the Mortgage Interest Statement you receive from your current lender does not reflect the prepaid interest you paid at closing. In this case, you should receive a Mortgage Interest Statement from this lender also. If not, your closing settlement statement will also show the amount of prepaid interest paid at closing.
State and Local Property Taxes
The amount of state and local property taxes you paid in 2020 are also deductible if you itemize your deductions. Homeowner’s insurance premiums are not tax deductible however.
Buyer’s closing costs that are tax deductible include: sales tax issues at closing, real estate taxes charged at closing, mortgage interest paid at closing, real estate taxes paid by the mortgage lender, and loan origination fees (points).
Seller’s closing costs that are tax deductible include: owner’s title insurance, property taxes paid at closing, recording fees, survey fees, transfer or stamp tax fees, and closing costs paid for the buyer. Sellers can also deduct cost of repairs due to an inspection, staging fees, legal fees, escrow fees, advertising costs, and real estate agent commissions.
If you buy and sell in the same year, tax deductions can be taken on both the sale and the purchase.
Capital Gains Exemption
The capital gains tax is the fee applied to the profits earned when selling your home. To calculate your capital gains subtract the cost of buying your home and the cost of improvements you have made, such as adding a pool or sunroom, from the sales price. This number is the profit or capital gain you will be taxed on. Even though the capital gain is added to your income, it is taxed differently than your ordinary income. The capital gains tax rate for tax year 2020 ranges from 0% to 28%, depending on your situation. But don’t despair… one important exemption exists. When selling your primary residence, you can exclude capital gains up to $250,000 from your income taxes. Yahoo! If you have lived in your home for 2 out of the past 5 years, the property is considered your primary residence.
If you didn’t buy or sell a home in 2020 and are considering buying or selling in The New River Valley this year, contact Desi Sowers, a professional, experienced Realtor, and let her assist you with all your real estate needs. Visit https://www.desisowers.com/, call 540-320-1328 or send her an email at Desi@DesiSowers.com.