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Tax Benefits Every Homeowner Should Know About
It’s tax season again, but being a homeowner might just make it rain at refund time. Check out the tax-deductible expenses, exemptions, and credits below. Whether you own a house, condo, or mobile home, they can save you big money when you file. Just be sure to compare your total itemized deductions against the standard deduction and see which is higher (you’ll have to choose between standard OR itemized on your return). It’s also good to know what you can’t deduct before you land in hot water with the IRS…
Mortgage Interest
A house payment is comprised of two parts: principal and interest. The principal goes toward reducing the amount you owe on your loan and is not deductible. However, the interest you pay is deductible as an itemized expense on your tax return. You can generally deduct interest on the first $750,000 of your mortgage (or $375,000 each if you’re married filing separately) if you purchased your home after December 15th 2017. Those who purchased earlier (10/14/1987 – 12/15/2017) can deduct interest paid on up to a $1m mortgage.
Property Taxes
You can deduct up to $10,000 of property taxes you paid (or $5,000 if you’re married filing separately). If you have a mortgage, the amount you paid in taxes will be included on the same annual lender statement that shows your loan interest information. If you paid the property taxes yourself but don’t have receipts, you should be able to locate the total tax amount on your county assessor’s website.
Home Improvements
Making improvements on a home can help you reduce your taxes in a few possible ways:
- If using a home equity loan or other loan secured by a home to finance home improvements, these loans will qualify for the same mortgage interest deductions as the main mortgage. Only the interest associated with the first $100,000 is deductible (and if you’ve already maxed out the interest deduction on your main mortgage, you won’t be eligible for any additional deduction for this loan).
- Tracking home improvements can help when the time comes to sell. If a home sells for more than it was purchased for, that extra money is considered taxable income. However, you are allowed to add capital improvements to the cost/tax basis of your home thereby reducing the amount of taxable income from the sale. Keep in mind that most taxpayers are exempted from paying taxes on the first $250,000 (for single filers) and $500,000 (for joint filers) of gains.
- Home improvements made to accommodate a person with a disability (yourself, your spouse, or your dependents who live with you) may be deductible as medical expenses. Examples include adding ramps, widening doorways/hallways, installing handrails or grab bars, lowering kitchen cabinets, or other modifications to provide wheelchair access.
- If you live in Washington State and apply with your county prior to construction, you may be able to get a 3-year property tax exemption for major home improvements (including an ADU or DADU) that add up to 30% of the original home’s value.
Home Office Deduction
If you run a business out of your home, you can take a deduction for the room or space used exclusively for work as your principal place of business. This includes working from a garage, as well as a typical office space. Unlike most of the other deductible expenses, you can deduct home office expenses even if you opt to take the standard deduction.
This deduction can include expenses like mortgage interest, insurance, utilities, and repairs, and is calculated based on “the percentage of your home devoted to business use,” according to the IRS.
Home Energy Tax Credits
For homeowners looking to make their primary home a little greener, either the Energy Efficient Home Improvement Credit or the Residential Energy Clean Property Credit can help offset the cost of energy efficiency improvements. Even better, these are credits, which means they directly lower your tax bill.
- Energy Efficient Home Improvement Credit: 30% of the cost for qualified high-efficiency doors, window, insulation, air conditioners, water heaters, furnaces, heat pumps, etc. Maximum credit of $1,200 (heat pumps, biomass stoves and boilers have separate max of $2,000).
- Residential Clean Energy Credit: 30% of the cost for adding qualified solar/wind/geothermal power generation, solar water heaters, fuel cells, and battery storage.
What You Can’t Deduct:
- Mortgage Insurance (this is a change as of 2022)
- Title Insurance
- Closing Costs
- Loan Origination Points
- Down Payment
- Lost Earnest Money
- Homeowner’s Dues*
- Homeowner’s/Fire Insurance*
- Utilities*
- Depreciation*
- Domestic staff or services*
*Unless it’s related to your home-office deduction—contact your tax pro to see if it’s a qualified deduction for you.
Do you have a low-income, disabled or senior homeowner in your life? Check out this article on King County property tax relief.
Psst…every homeowner’s financial situation is different, so please consult with a tax professional regarding your individual tax liability.
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We earn the trust and loyalty of our brokers and clients by doing real estate exceptionally well. The leader in our market, we deliver client-focused service in an authentic, collaborative, and transparent manner and with the unmatched knowledge and expertise that comes from decades of experience.
2737 77th Ave SE, Mercer Island, WA 98040 | (206) 232-0446
mercerisland@windermere.com
© Copyright 2024, Windermere Real Estate/Mercer Island.
Adapted from an article that originally appeared on the Windermere Blog, written by: Chad Basinger.
Property Tax Relief Programs in King County
More than 26,000 low-income seniors and disabled people in King County who qualify for a tax exemption haven’t claimed it…are you or your family member one of them?
If you are homeowner, make $58k or less per year, and are either age 61+ or retired due to disability, there is a good chance you qualify. You can even retroactively apply for the exemption for the prior 3 years!
Scroll down for details on this exemption plus 4 other property tax relief programs that King County offers.
In another county? Here is the full list of income thresholds for every county in Washington State, and here is another link to view the programs each county offers.
Senior/Disabled Property Tax Exemption
WHAT IS IT?
A reduction in King County property tax for seniors, people with disabilities, and disabled veterans.
WHO QUALIFIES?
- Seniors age 61+
or
- Those who cannot work due to a disability
or
- Veterans with service-related disabilities
YOU MUST…
- Own your home
- Have occupied it as a primary residence at least 6 months out of the year
INCOME LIMIT
- $58,423 maximum annual household income in the previous year
WAYS TO APPLY
- Click here to apply online
- Call 206-296-3920
- Ask your local senior center if they help with applications
Senior/Disabled Property Tax Deferral
WHAT IS IT?
The ability for seniors & disabled people to defer unpaid property tax/special assessments, including back taxes for as long as you’ve owned the home. Deferred taxes + any accumulated interest then become a lien on the property until it’s repaid.
WHO QUALIFIES?
- Seniors age 60+
or
- Those who cannot work due to a physical disability
YOU MUST…
- Own your home and have lived in it for more than 9 months in a calendar year
- Meet an equity requirement
INCOME LIMIT
- $67,411 maximum annual household disposable income
HOW TO APPLY
- Call 206-263-2338
MORE TAX RELIEF PROGRAMS…
Limited Income Deferral
WHAT IS IT?
The ability to defer the second installment of your property taxes/special assessments (normally due October 31st) if you are a low-income homeowner. The deferred taxes plus interest become a lien on the property until they’re repaid.
YOU MUST…
- Have owned your property for 5 years
- Be living in the home as of January 1st of the application year AND more than 9 months during that year
- Meet an equity retirement
- Have already paid the first half of your taxes (due April 30th)
INCOME LIMIT
- $57,000 maximum annual household income in the previous year
HOW TO APPLY
- Call 206-263-2338
Homeowner Improvement Exemption
WHAT IS IT?
Relief from tax increases caused by major additions or remodels.
YOU MUST…
- Own a detached single family dwelling (including mobile homes)
- File your claim for exemption with the assessor BEFORE construction is complete
HOW TO APPLY
- Call 206-263-2338
Flood & Storm Damage Property Tax Reduction
WHAT IS IT?
Tax relief for property damaged by something beyond the owner’s control. Eligible properties receive a reduction of assessed value resulting in lower property taxes. In addition, taxpayers can receive an exemption to keep taxes lower for the 3 years after they rebuild.
YOU MUST…
- Have your property on the assessment roll as of January 1st in the year it was damaged
- Have property that was destroyed, OR was in a declared disaster area and reduced in value by more than 20% as a result of the disaster
HOW TO APPLY
- Complete a Destroyed Property Claim Form and file it with King County Dept of Assessments within 3 years of the damaging event
- Call 206-263-2332 with questions
For more information on any of these programs, visit the King County Assessor’s tax relief page. You can also find info for other counties on the WA Dept of Revenue website.
Find a Home | Sell Your Home | Property Research
Neighborhoods | Market Reports | Our Team
We earn the trust and loyalty of our brokers and clients by doing real estate exceptionally well. The leader in our market, we deliver client-focused service in an authentic, collaborative, and transparent manner and with the unmatched knowledge and expertise that comes from decades of experience.
2737 77th Ave SE, Mercer Island, WA 98040 | (206) 232-0446
mercerisland@windermere.com
© Copyright 2023, Windermere Real Estate/Mercer Island.
What is FIRPTA Certification?
A complete overview on why you need to know about it…
If you are purchasing property from a non-US individual or entity, you may be required to withhold taxes under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), 26 U.S.C. 1445 (unless one of the exceptions in the Act applies). The seller must complete a certification to inform both you (the purchaser) and the closing agent (typically the escrow company) whether tax withholding is required.
The above law applies to foreign corporations, partnerships, trusts, estates and other foreign entities, as well as to foreign individuals. If the seller is a corporation, partnership, trust, estate or other entity, the terms “I” and “my” in the doc refer to the entity rather than an individual. A “real property interest” includes full or part ownership of land & any improvements; leaseholds; options to acquire any of the foregoing; and an interest in foreign corporations, partnerships, trusts or other entities holding U.S. real estate.
Under IRS code, the certification must include the property address, seller’s citizenship status, taxpayer identification number, and home address. Note that while the certification is delivered to the buyer prior to closing, social security numbers are not inserted until after the seller signs closing papers in order to prevent fraud.
Obtaining this completed certification is of critical importance because a home buyer can be personally liable for the full amount of FIRPTA withholding tax required to be withheld, plus penalties and interest. When a seller is a foreign person, the buyer and seller are advised to seek the guidance of an accountant or tax attorney to determine the best steps forward. Closing agents and real estate brokers are not qualified or permitted to provide tax advice or guidance.
What the FIRPTA Certification says about Required Withholding if the Seller is a Non-Resident Alien under IRS Guidelines
“If the seller is a non-resident alien, and has not obtained a release from the IRS, then the closing agent must withhold 15% of the amount realized from the sale and pay it to the IRS, unless the buyer certifies that the selected statement below is correct:
□ Amount Realized ($300,000 or less) and Family Residence= No Tax. (a) I certify that the total price that I am to pay for the property, including liabilities assumed and all other consideration to Seller, does not exceed $300,000; and (b) I certify that I or a member of my family* have definite plans to reside on the property for at least 50% of the time that the property is used by any person during each of the first two twelve-month periods following the date of this sale. If the buyer certifies these statements, there is no tax.
□ Amount Realized (more than $300,000, but not exceeding $1,000,000) and Family Residence= 10% Tax. (a) I certify that the total price that I am to pay for the property, including liabilities assumed and all other consideration to Seller, exceeds $300,000, but does not exceed $1,000,000; and (b) I certify that I or a member of my family* have definite plans to reside on the property for at least 50% of the time that the property is used by any person during each of the first two twelve-month periods following the date of this sale. If Buyer certifies these statements, then Closing Agent must withhold 10% of the amount realized from the sale and pay it to the IRS.
* (Defined in 11 U.S.C. 267(c)(4). It includes brothers, sisters, spouse, ancestors and lineal descendants).
Under penalties of perjury, I declare that I have examined this Certification and to the best of my knowledge and belief both statements are true, correct and complete. I understand that this Certification may be disclosed to the IRS and that any false statement I have made here could be punished by fine, imprisonment or both.”
Exceptions from FIRPTA Withholding
The IRS lists eleven exceptions to FIRPTA withholding listed on the IRS website. Of these, there are three that are more typically seen in residential real estate transactions:
OWNER-OCCUPIED BUYER: Sales price is $300,000 or less, and the individual buyer or a member of their family has definite plans to reside in the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the sale.
NOT A FOREIGN SELLER: Seller signs a FIRPTA certification (form 22E) stating that the seller is not a foreign person.
WITHHOLDING CERTIFICATE: Before closing, seller obtains a withholding certificate from the IRS which reduces or eliminates the FIRPTA tax for the foreign person. The seller or transferor should also work with an accountant or tax attorney.
In most cases, the buyer or closing agent is the withholding agent. If you are the transferee/buyer, you must find out if the transferor is a foreign person by obtaining the FIRPTA Certification. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.
Delivery of the FIRPTA Certification is Required in NWMLS Purchase Agreements
Because this could be a significant aspect of a home purchase, our local MLS requires all sellers to disclose if they are a foreign person at the time of listing a property for sale. The seller’s real estate broker will also ask the seller to complete the FIRPTA Certification on a NWMLS Form 22E at that time.
The seller or their real estate broker must then deliver the completed NWMLS Form 22E (as part of the contract or separately to the closing agent) within 10 days after you have a mutually agreed upon contract. Failure to do so can create an out for the buyer.
The contract further requires seller to warrant their citizen status to buyer, provides instructions to the closing agent, and outlines the termination process in the event the FIRPTA Certification is not timely delivered.
“Seller Citizenship and FIRPTA. Seller warrants that the identification of Seller’s citizenship status for purposes of U.S. income taxation in Specific Term No. 14 is correct. Seller shall execute a certification (NWMLS Form 22E or equivalent) under the Foreign Investment in Real Property Tax Act (“FIRPTA”) and provide the certification to the Closing Agent within 10 days of mutual acceptance. If Seller is a foreign person for purposes of U.S. income taxation, and this transaction is not otherwise exempt from FIRPTA, Closing Agent is instructed to withhold and pay the required amount to the Internal Revenue Service.
If Seller fails to provide the FIRPTA certification to the Closing Agent within 10 days of mutual acceptance, Buyer may give notice that Buyer may terminate the Agreement at any time 3 days thereafter (the “Right to Terminate Notice”). If Seller has not earlier provided the FIRPTA certification to the Closing Agent, Buyer may give notice of termination of this Agreement (the “Termination Notice”) any time following 3 days after delivery of the Right to Terminate Notice. If Buyer gives the Termination Notice before Seller provides the FIRPTA certification to the Closing Agent, this Agreement is terminated and the Earnest Money shall be refunded to Buyer.”
Definitions and Resources Related to FIRPTA
The IRS provides a Definitions of Terms and Procedures Unique to FIRPTA web page with helpful information, including how executors of estates, partnerships, corporations, and spouses (where only one spouse is a foreign person) should proceed.
In addition, there is also Individual Taxpayer ID Guidance for Foreign Property Buyers/Sellers to provide documentation requirements for individuals seeking an ITIN.
If you are looking for information on Reporting and Paying Tax on U.S. Real Property Interests or general Real Estate Tax Center guidance, you’ll find it on the IRS.gov website as well.
Final Thoughts…
Obtaining FIRPTA Certification in your home purchase and, when your seller is a foreign person, verifying that any required withholding is made is an important step you can take to provide peace of mind. This article is provided solely to inform you of the need to be alert to this issue. It does not replace competent legal or tax advice. You should also seek the guidance of a qualified professional regarding your individual situation.
We earn the trust and loyalty of our brokers and clients by doing real estate exceptionally well. The leader in our market, we deliver client-focused service in an authentic, collaborative, and transparent manner and with the unmatched knowledge and expertise that comes from decades of experience.
2737 77th Ave SE, Mercer Island, WA 98040 | (206) 232-0446
mercerisland@windermere.com
© Copyright 2021 Windermere Mercer Island
Thinking About Buying a Second or Vacation Home?
Here are a few tips to make sure it’s worthwhile…
These days, having your own home away from home is a compelling concept. There are many clear benefits including being able to use your home how you wish, decorate to your taste, and include your furry friends in your time away. There are also challenges to be considered as home security, maintenance, and holding expenses are nothing to ignore.
One consideration to start with is whether the home will be solely used by your family or become an income-producing vacation rental. In addition to being a lifestyle choice, this determination will impact your income taxes and insurance needs and should be made before you embark upon this journey.
There are advantages and disadvantages to both options:
Owning as a Personal Second Home
PROS
- Comfort: Returning to the same place is familiar and often more relaxing than staying in a hotel or vacation rental. It allows you to enjoy your space as you wish and include pets and hobbies in your home away from home. Proximity to your primary residence is an important factor. How long will it take to get there? You will likely visit more often if your second home takes under three hours to travel to. Choosing a location that you will enjoy for years to come is essential to making a good purchase decision.
- Convenience: The ability to keep your possessions that are used exclusively at the second home simplifies travel and packing and makes it easier to be surrounded by the things you enjoy.
- Long-term profit: While assets fluctuate in value in the short term, vacation properties are more likely to retain their value and appreciate because they are located in popular areas with a geographically limited supply. At some point you could have a nice nest egg or a property that becomes a family vacation home for future generations.
- Future retirement options: A common retirement goal is to have a place to retreat for part of the year in addition to your main residence. Whether a second home will become a full-time venue in retirement or continue to be a part-time get-away, having it established before retirement gives you options.
CONS
- Initial cost: Buying a second or vacation home is a big investment. Down payment requirements are typically higher on non-primary residences and that cash outlay can take away from other investment opportunities.
- Maintenance: Your second or vacation home will require maintenance and upkeep just like your primary residence. You’ll need to plan to tackle that yourself or hire someone else to do it for you. Let it get away from you, and you will be spending your leisure time worrying about everything that needs to get done instead of relaxing.
- Commitment: When you are paying a significant amount of money each month for a second or vacation home, you may feel that you need to constantly visit the property to justify your investment. You’ll need to ask yourself if the idea of going to the same place over and over again is appealing or a turn-off.
- Other considerations: Evaluating and mitigating your exposure to natural disaster (fire, flood, earthquake, tsunami, etc.) and liability risks (guest injury, burglary, squatting, vandalism, arson) on a home that is vacant for much of the time is an important consideration. Determine how you will keep your home safe and secure.
Owning as an Income-Producing Vacation Rental
PROS
- Income to offset expenses: A good vacation rental property generally provides a healthy rental revenue which could potentially cover mortgage payments and operating expenses. Using an online short-term rental service like Airbnb makes it convenient to manage your rental property. Their website interface makes pricing, marketing, and communication with potential guests straightforward and easy. Airbnb will also oversee the billing process for you.
- Tax considerations: You may qualify for federal tax breaks and deductions related to holding your investment property. This can help offset the expense of owning and provide investment opportunities for the future.
- Long-term profit: Like a second home, vacation properties are more likely to retain their value and appreciate over time. At some point you could have a nice nest egg or a property that becomes a family vacation home for future generations.
- Future retirement options: While there are tax considerations to converting an income-producing property into a personal use property, owning a vacation home allows you to insulate yourself against rising real estate prices and give you options for future use.
CONS
- Initial cost: Buying a vacation home as an investment property will require both a hefty down payment and initial start-up expenses to furnish and supply the home. You will need to evaluate that cash outlay with other potential investment opportunities.
- Management and maintenance: Vacation rentals can be costly to manage, both in terms of time and money. These properties may require seasonal upkeep and special maintenance considerations. You may even incur costs to maintain or monitor the property even when it’s not actively being utilized.
- Revenue fluctuations: Vacation rental properties are particularly sensitive to seasonal fluctuations and economic downturns, which could leave you financially exposed. Having a property that is attractive in multiple seasons is a definite plus.
- Short-term rental restrictions: Many state and local municipalities are seeking to reign in short-term vacation rentals, which could put a damper on potential revenue from these properties. Many now require a minimum rental period of 30 days. In contrast, there are locations that are ideal for these kinds of short-term rentals. Look into regional ordinances, do a Google search, and check out local newspapers to discover recent talk of changing or enforcing such codes.
- Other considerations: In addition to evaluating and mitigating your exposure to natural disaster and liability risks, you will want to consider other holding expenses. These might include higher renovation and repair costs due to high-use or damage. Most travelers expect the latest appliances and furnishings, so you will have to update every few years. Unfortunately, short-term renters are less likely to report any necessary repairs and guests are far less likely to treat the property with respect since there is no sense of ownership or obligation.
Final Thoughts
Regardless of your decision to use the property personally or as an investment, checking in with your CPA and financial advisor is a good first step. They can advise you of pros and cons of each approach, States that are more or less favorable to own a non-primary residence in, and whether you should establish a trust or LLC to hold the property in.
Having a savvy real estate broker help you understand the local scene, evaluate options, and provide vetted resources is essential, especially when you are looking in an area you are less familiar with.
Still have questions? Contact one of our knowledgeable brokers for assistance with exploring a second and vacation home purchase locally or a referral to a great broker in other areas you are considering.
Find a Home | Sell Your Home | Property Research
Neighborhoods | Market Reports | Our Team
We earn the trust and loyalty of our brokers and clients by doing real estate exceptionally well. The leader in our market, we deliver client-focused service in an authentic, collaborative, and transparent manner and with the unmatched knowledge and expertise that comes from decades of experience.
2737 77th Ave SE, Mercer Island, WA 98040 | (206) 232-0446
mercerisland@windermere.com
© Copyright 2021 Windermere Mercer Island
