Tax deduction can save you huge chuck of money, but tax deduction is no short of risks. Even the most proactive investors sometimes end up being in a pickle by deducting either wrong items or the wrong amount of right items. To ensure not ending up in committing these serious errors, there are some precautionary measures you can take into consideration.
With that said, it would be worth mentioning to discuss some of the most common tax deduction traps that have been causing serious concerns for the real estate investors.
Deducting disqualified energy-efficient devices
You can get $500 worth of tax credit on certain items like biomass stove, central AC, insulation and roof. About 30% of tax credit is available on appliances on devices that generate energy such as wind turbines, solar panels and geothermal heat pumps. Nevertheless, the regulations regarding what devices really qualify you for tax credit are strict.
What some people believe is that they can get tax credit by purchasing items which have ‘Energy Star’ label. However, it really doesn’t work like that. You can get information regarding this matter from concerned authorities.
Tax deduction on PMI
If you did not pay 20% down payment of your home, you would need to pay Private mortgage insurance. This fee is tax deductible only if you are earning under $100,000 per annum. If your AGI is between $100,000 and $109,000, there would be a part of PMI that can be deducted. But, if it is above $110,000, you will not be qualified for this tax deduction at all.
Tax deduction on home office
There is a serious amount of money that you can save in form of tax credit if you own a home office. In a simplified manner, you can get the tax deduction of $5 per square foot of the home office. However, the rules regarding whether or not you qualify for this tax deduction are strict. The home office you own should be your primary place to work, not a place that you use sometimes.
Wrong amount of property taxes
Many people would assume that one can simply get deduction in taxes if he/she pays taxes using an escrow account. Well, it’s really not true. The amount present in the property taxes is usually a ballpark; means, money present in the account can be more or less than the taxes that are payable.
Information regarding how to get the taxes deducted can be obtained from the bank you deal with for paying your taxes.
Deduction on home equity loan
The amount of tax deduction in home equity loan depends upon use of loan. For instance, the deductible amount of home equity loan according to general rule is $100,000. But if you have got a loan of $250,000 because you want to send your child abroad for studies, the amount deductible would be the first $100,000. However, if you need the money to replace the roof, the deductible amount you can get would be $500,000 minimum.