Working from home can offer many advantages including tax deductions, just take care what you try to write off for your home office on your return.

If you work from home, even on a part-time basis, you can probably save a few dollars come tax time. That’s because if you itemize your deductions on your federal tax return, you can write off as a business expense part of the cost of owning and operating your home. Everything from electric bills to property taxes may be fair game.

Those tax deductions can add up, thus lowering your taxable income and reducing the amount you owe Uncle Sam. Before you start spending that refund, however, there are a few rules you need to understand and heed. It’s a good idea to consult a tax adviser to be sure that you’re filing the right schedules and maximizing your deductions.

Passing the IRS litmus test

To meet IRS guidelines, your home office must be your principal place of business, or the place you see clients in the normal course of business. Parts of your home you use to store products or equipment for your business also count. That doesn’t mean that all your work has to be done from home. If you’re an outside salesperson, you probably spend most of your work time elsewhere. But if you do you billing and return customer calls primarily from your home, your home office should qualify.

You can also qualify for the deduction if your employer requires you to work from home, as long as you don’t charge your employer rent. One big catch is that you can’t deduct expenses for your home office if you choose to work at home even though your employer provides you with an office. IRS Form 8829 can be used by self-employed workers to calculate the home office deduction, which should be reported on Schedule C.

Measuring your home office

The amount you can deduct for your home office depends on the percentage of your home used for business. Your work space doesn’t need to be a separate room—a table in a corner qualifies. But it has to be an area that’s used solely for business. The tax break also covers separate structures on your property, like a detached garage you’ve converted to an office. Unlike an office inside your home, a separate structure doesn’t have to be your main place of business to qualify for a deduction. That’s because the IRS believes your family is less likely to use a separate structure as a part-time play area or den, says Mark Luscombe, principal analyst for tax and consulting at CCH. 

To calculate what percentage of your house the home office occupies, divide your home office’s square footage by the total square footage of your home. If your home is 3,000 square feet and your office is 150 square feet, for example, you’d use 5% to calculate your deductions. Not sure how big your house is? Check the documents you received when you bought your home—there’s probably a detailed rendering—or measure the outside of your home and multiply length times width.

What can you deduct?

Once you’ve figured out what percentage of your home you use for business, you can apply that percentage to different home expenses. These include:

• Mortgage interest
• Real estate taxes
• Utilities (heating, cooling, lights)
• Home repairs and maintenance (painting, cleaning service)
• Homeowners insurance premiums

Just take each expense and multiply it by your home office percentage (the 5% mentioned above). That’s the amount you can deduct as a business expense. So if you spend $150 a month on electricity, you can deduct $7.50 as a business expense. That adds up to a $90 deduction per tax year. If your annual business expenses total $10,000, your deduction is $500. In 2009, lowering your taxable income by $500 to $99,500 would’ve cut your tax bill by $113.

Save bills or cancelled checks to prove what you spent in case of an IRS audit. Take an hour a week to file them away. Also, only repairs can be expensed; improvements must be depreciated. One catch: You can only deduct expenses if your business generates income. Expense deductions are limited if they exceed your gross business income, says Mark Steber, chief tax officer at Jackson Hewitt Tax Service.

Don’t forget depreciation

Depreciation is based on the idea that everything—even something like a home—wears out eventually. To figure home office depreciation, start by calculating the tax basis of your home: generally the purchase price plus the cost of improvements, minus the value of the land it sits on. Next, multiply the tax basis by the percentage of your home used for work. This gives you the tax basis for you home office. Finally, multiply that by a depreciation percentage that’s set periodically by the IRS. There are caveats. For a crash course, read IRS Publication 946 or talk to a tax professional.

One reason to think twice before taking depreciation on your home office is that it reduces the capital gains deduction you can get when you sell a home. If you’ve deducted depreciation, you have reduced your capital gains exemption ($250,000 of profit if you’re a single filer, $500,000 for joint filers) by the depreciated amount. That could mean you’ll owe taxes when you sell, especially if you’ve lived in your home for a while.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

Donna Fuscaldo has written about personal finance for more than decade for Dow Jones Newswires, the Wall Street Journal, and Fox Business News. She’s currently a freelance writer with her own home office.

Source: http://www.houselogic.com/articles/tax-deductions-when-you-work-home/

While being a landlord certainly has its cons, tops among its pros are the tax deductions for rental homes enjoyed by owners.

From finding tenants to fixing faucets, renting out a home can be a lot of work. Yet perhaps the biggest reward for being a landlord isn’t the rent checks, but rather the considerable tax deductions for rental homes.

The tax code permits most owners of residential rental properties to offset income by writing off numerous rental home expenses. IRS Publication 527, “Residential Rental Property,” has all the details.

Writing off rental home expenses

Many rental home expenses are tax deductible. Save receipts and any other documentation, and take the deductions on Schedule E. Figure you’ll spend four hours a week, on average, maintaining a rental property, including recordkeeping.

Here are some of the most common deductible expenses for rental homes, according to the IRS. You can usually take these write-offs even if the rental home is vacant temporarily. In general, claim the deductions for the year in which the expenses are incurred:

• Advertising

• Cleaning and maintenance

• Commissions paid to rental agents

• Homeowner association/condo dues

• Insurance premiums

• Legal fees

• Mortgage interest

• Taxes

• Utilities

Less obvious deductions include expenses to obtain a mortgage, and fees charged by an accountant to prepare your Schedule E. And don’t forget that a rental home can even be a houseboat or trailer, as long as there are sleeping, cooking, and bathroom facilities.

Limits on travel expenses

You can deduct expenses related to traveling locally to a rental home for such activities as showing it, collecting rent, or doing maintenance. If you use your own car, you can claim the standard mileage rate of 55 cents per mile (in 2009).

Traveling outside your local area to a rental home is another matter. You can write off the expenses if the purpose of the trip is to collect rent or, in the words of the IRS, “manage, conserve, or maintain” the property. If you mix business with pleasure during the trip, you can only deduct the portion of expenses that directly relates to rental activities.

Repairs vs. improvements

Another area that requires rental home owners to tread carefully is repairs vs. improvements. The tax code lets you write off repairs—any fixes that keep your property in working condition—immediately as you would other expenses. The costs of improvements that add value to a rental property or extend its life must instead be depreciated over several years. (More on depreciation below.)

Think of it this way: Simply replacing a broken window pane counts as a repair, but replacing all of the windows in your rental home counts as an improvement. Patching a roof leak is a repair; re-shingling the entire roof is an improvement. You get the picture.

Deciphering depreciation

Depreciation refers to the value of property that’s lost over time due to wear and tear. In the case of improvements to a rental home, you can deduct a portion of that lost value every year over a set number of years. Carpeting and appliances in a rental home, for example, are usually depreciated over five years.

You can begin depreciating the value of the entire rental property as soon as the rental home is ready for tenants, even if you don’t yet have any. In general, you depreciate the value of the home itself over 27.5 years. You’ll have to stop depreciating once you recover your cost or you stop renting out the home, whichever comes first.

Depreciation is a valuable tax break, but the calculations can be tricky and the exceptions many. Read IRS Publication 946, “How to Depreciate Property,” for additional information, and use Form 4562 come tax time. Consult a tax adviser.

Profits and losses on rental homes

The rent you collect from your tenant every month counts as income. You offset that income, and lower your tax bill, by deducting your rental home expenses including depreciation. If, for example, you received $9,600 rent during the year and had expenses of $4,200, then your taxable rental income would be $5,400 ($9,600 in rent minus $4,200 in expenses).

You can even write off a loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental is as simple as placing ads, setting rents, or screening prospective tenants.

If you’re married filing jointly and your modified adjusted gross income is $100,000 or less, you can deduct up to $25,000 in rental losses. The deduction for losses gradually phases out between income of $100,000 and $150,000. You may be able to carry forward excess losses to future years.

Let’s say you take in $12,000 in rental income for the year but your expenses total $15,000, resulting in a $3,000 loss. If your income is less than $100,000, you can take the full $3,000 loss. By deducting $3,000 from taxable income of $100,000, a married couple filing jointly would cut their tax bill by $750.

Tax rules for vacation homes

If you have a vacation home that’s mostly reserved for personal use but rented out for up to 14 days a year, you won’t have to pay taxes on the rental income. Some expenses are deductible, though the personal use of the home limits deductions.

The tax picture gets more complicated when in the same year you make personal use of your vacation home and rent it out for more than 14 days. Read our story about tax deductions for vacation homes for an explanation.

Donna Fuscaldo has written about personal finance for more than 10 years at the Wall Street Journal, Dow Jones Newswires, and Fox Business. She one day hopes to own a vacation home in the Catskills of New York.

Source: http://www.houselogic.com/articles/tax-deductions-rental-homes/

The first-time homebuyers' tax credit, along with low interest rates and home prices, may have led to builders feeling a bit better about the market for new, single-family homes.

According to the latest National Association of Home Builders/Wells Fargo Housing Market Index, builder confidence increased to 17 in February, up from the 15 reported through the index in January.

NAHB chairman Bob Jones said that a variety of factors, including the tax credit made available to first-time homebuyers, makes it attractive for consumers to buy homes at this time.

"As a result, builders are slightly more optimistic that the housing recovery is finally beginning to take root," Jones said.

Through the tax credit, first-time homebuyers have an $8,000 incentive to purchase a home, provided they sign a contract for the home by April 30. If they do so, prospective homeowners have until June 30 to complete the purchase.

Along with first-time homebuyers, the tax credit was expanded last year to include people who are purchasing a new permanent residence. Those buyers may qualify for a tax credit of $6,500, provided they sign by April 30.

Though the index did increase in February, it is still far from a level that might indicate more wide-spread confidence in the housing market. To calculate the index, builders are asked to rate both current and expected sales of single-family homes, while also being asked to gauge the amount of traffic they are getting from potential buyers.

A reading on the scale above 50 means that the number of builders who see conditions as "good" outpaced the number who see them as "poor." Though the index is still below 50, the 17 posted in February is the highest mark seen on the index since November 2009.

Source: http://www.credit.com/news/housing-market/2010-02-17/credit-for-first-time-homebuyers-helps-improve-builder-confidence-in-home-sales.html

Keeping track of the cost of capital improvements to your home can really pay off on your tax return when it comes time to sell.

It’s no secret that finishing your basement will increase your home’s value. What you may not know is the money you spend on this type of so-called capital improvement could also help lower your tax bill when you sell your house.

Tax rules let you add capital improvement expenses to the cost basis of your home. Why is that a big deal? Because a higher cost basis lowers the total profit—capital gain, in IRS-speak—you’re required to pay taxes on.

The tax break doesn’t come into play for everyone. Most homeowners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to track capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.

What counts as a capital improvement?

While you may consider all the work you do to your home an improvement, the IRS looks at things differently. A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition. According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.

Capital improvements can include everything from a new bathroom or deck to a new water heater or furnace. Page 9 of IRS Publication 523 has a list of eligible improvements. There are limitations. The improvements must still be evident when you sell. So if you put in wall-to-wall carpeting 10 years ago and then replaced it with hardwood floors five years ago, you can’t count the carpeting as a capital improvement. Repairs, like painting your house or fixing sagging gutters, don’t count. The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life.

There can be a fine line between a capital improvement and a repair, says Erik Lammert, tax research specialist at the National Association of Tax Professionals. For instance, if you replace a few shingles on your roof, it’s a repair. If you replace the entire roof, it’s a capital improvement. Same goes for windows. If you replace a broken window pane, repair. Put in a new window, capital improvement. One exception: If your home is damaged in a fire or natural disaster, everything you do to restore your home to its pre-loss condition counts as a capital improvement.

How capital improvements affect your gain

To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name a few. You should be able to find all those costs on the settlement statement you received at your closing.

Next, you’ll need to account for any subsequent capital improvements you made to your home. Let’s say you bought your home for $200,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $225,000.

Now, suppose you’ve lived in your home as your main residence for at least two out of the last five years. Any profit you make on the sale will be taxed as a long-term capital gain. You sell your home for $475,000. That means you have a capital gain of $250,000 (the $475,000 sale price minus the $225,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. End of story.

Here’s where it gets interesting. Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you’ve saved about $3,750 in taxes (based on the current 15% tax rate on capital gains). Well worth taking an hour a month to organize your home-improvement receipts, don’t you think?

Watch out for these basis-busters

Some situations can lower your basis, thus increasing your risk of facing a tax bill when you sell. Consult a tax advisor. One common one: If you take depreciation on a home office, you have to subtract those deductions from your basis. Any depreciation taken if you rented your house works the same way. You also have to subtract subsidies from utility companies for making energy-related home improvements or energy-efficiency tax credits you’ve received. If you bought your home using the federal tax credit for first-time homebuyers, you’ll have to deduct that from your basis too, says Mark Steber, chief tax officer at Jackson Hewitt Tax Services.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

Donna Fuscaldo has written about personal finance for more than 10 years at the Wall Street Journal, Dow Jones Newswires, and Fox Business. She’s currently remodeling her home—and aiming to make a profit on it one day.

Source: http://www.houselogic.com/articles/tax-breaks-capital-improvements-your-home/

Bills to extend the maximum $8,000 tax credit for first-time home buyers, which expires Nov. 30, are pending in both the U.S. House and the Senate.

Sen. Christopher J. Dodd, a Connecticut Democrat and chairman of the Senate Banking, Housing, and Urban Affairs Committee, is co-sponsor of a bill with Georgia Republican Sen. Johnny Isakson that would raise the credit amount to a maximum of $15,000.

Senate Majority Leader Harry M. Reid of Nevada favors an extension of the current credit. He was quoted by the Las Vegas Sun saying, "It's something we can get done."

Odds are that the credit will be extended and broadened to cover all buyers next year, but the chances of the amount increasing aren’t as good, observers say.

Source: Washington Post Writers Group, Kenneth R. Harney (08/22/2009)

Source: http://www.realtor.org/RMODaily.nsf/pages/News2009082401?OpenDocument