The end of the year provides wonderful opportunities for celebrating holidays with family and friends. While you enjoy the festive atmosphere, it’s also a good idea to give some thought to year-end planning concerns, especially those relating to real estate you own. Important considerations to include in your planning focus on maximizing the benefits of your real estate investment.
The best time to collect your documents for your 2019 tax return is at the end of the year — not in March or April of 2020. Start by gathering all your statements and receipts for the year. You don’t even need to sort through them. Just collect them and put them together in a safe place. Be sure it’s somewhere that you will easily find them in the spring.
If you purchased a home in 2019, include your real estate settlement documents in your efforts. You will need them when you work on your taxes.
If you own your home, property taxes are tax deductible in the year you actually pay them. The taxes on your home are deductible. So are taxes for any additional homes you own, such as a vacation home. Starting in 2018, a deduction limit of $10,000 applies to state and local taxes, including property taxes.
A deduction that some taxpayers overlook is the pro-rated property tax paid on a real estate purchase. Your closing documents list the pro-rated taxes you paid at settlement. Be sure to include that amount when you total your property taxes for the year.
Like property tax, home loan interest is also tax deductible up to a limit. The Tax Cuts and Jobs Act of 2017 made substantial changes in mortgage interest deductions as well as home equity interest deductions.
As of 2018, the home loan deduction limit is $750,000 for a first and second home, for binding contracts originated after December 16, 2017. For loans originated before that date, the limit is $1.1 million. The limitation applies to all your home loans, including mortgages and home equity loans. These limits apply if your second home is used as a residence. Different tax rules may apply if you rent out your second home.
A significant change in the 2017 tax law relates to home equity interest tax deductions. Now, home equity interest is deductible only if you use the money “to buy, build or substantially improve” the home that secures the loan. This interest counts toward the total home loan deduction limit.
Generally, expenses for home improvements and repairs are not tax deductible. But the cost of improvements does increase the cost basis cost of your home, so those expenses ultimately can result in tax savings when you sell your home. For that reason, collecting receipts for your home improvements in 2019 and saving them in a special place is extremely important.
There is one important situation in which improvements and repairs may be deductible. If you maintain an office at home or have a home business, and use a portion of your home exclusively for that purpose, you may qualify for a deduction for your home office or business. If you think you may qualify, it’s advisable to talk with a tax professional before you pursue the deduction.
In addition, the cost of improvements that are medically necessary may be deductible as medical expenses in the year the improvement is made. If you installed a ramp, modified a bathroom, lowered cabinets, or made a similar change for medical reasons, collect those receipts for your 2019 taxes. The expenses must be reasonable in light of the medical purpose. Changes made for architectural or aesthetic reasons do not qualify.
Finally, while most tax credits for residential energy efficiency have now expired, some tax credits for residential renewable energy products are still available through December 31, 2021. You may get a tax credit of up to 30% (depending on when the product is put in service) for qualifying geothermal heat pumps, solar water heaters, solar panels, small wind turbines, or fuel cells placed in service in a new or existing home.
One element of year-end real estate planning does not relate to taxes but to the insurance on your property. Every year, you should review your insurance policies to make sure that the policy fully covers the value of your property, including any improvements you made during the year. In addition, if you started a home business, you may need to add a separate policy to cover the business and potential related liability.
Planning considerations for real estate investors differ substantially from those of people who own residential properties for their own use. If you invest in real estate, you should consult with an accountant and a tax professional to ensure that you keep necessary records and accurately report your investment activities on your taxes.
In my practice at Ager Law Office, I assist clients with a broad range of real estate matters, including real property purchases, sales, and leases. From my Ann Arbor office, I serve clients throughout Washtenaw County. To talk with me about a real estate matter, call (734) 649-0784, send an email to email@example.com, or use the online contact form.