Benefit

Interest on your home mortgage may be fully deductible as an itemized deduction. There is no dollar limit on the amount of interest you can deduct annually, but there are limits on the size of the mortgage on which the interest is claimed. The mortgage interest rule applies to both fixed and adjustable rate mortgages.

The amount of acquisition indebtedness on which interest is deductible depends on when the loan was obtained:

• For loans obtained before October 14, 1987: No loan limit. As a practical matter, most of these old mortgages have been fully repaid by now.
• For loans obtained after October 13, 1987, and before December 16, 2017: $1 million.
• For loans obtained after December 15, 2017: $750,000.

The limits apply to your main home and one other residence. If unmarried co‐owners jointly own a home, each can use the applicable limit on acquisition indebtedness. For example, if a brother and sister bought a home together on May 1, 2017, with a $2 million mortgage, each can deduct interest on $1 million of the loan. In effect, the limit applies per residence(s).

A special limitation applies to distressed homeowners, as explained later.

Conditions

For interest to be fully deductible, you must meet 4 conditions:

1. Acquisition indebtedness (which is usually a mortgage used to buy or build your home) cannot exceed the limits explained earlier.
2. The debt must be secured by the residence.
3. You deduct interest on no more than 2 residences.
4. You are personally obligated for repayment of the debt.

DOLLAR LIMIT

The amount treated as acquisition indebtedness on which interest can be deductible is the total amount of such debt on your principal residence and designated second home. As explained earlier in this chapter, the time the mortgage is taken determines the dollar limit of the loan on which interest is deductible.

For loans obtained before October 14, 1987, there is no loan limit; most of these loans have already been fully repaid. For loans obtained after October 13, 1987, and before December 16, 2017, the dollar limit is $1 million. And for loans obtained after December 15, 2017, the dollar limit is $750,000.

If the total amount of acquisition indebtedness exceeds the applicable dollar limit, then only a percentage of the interest is deductible based on this formula:

Planning Tips

Think hard about the type and amount of mortgage you want to take out when you buy your home. Once you have purchased your home, additional financing generally doesn't qualify as acquisition indebtedness.

If you refinance home acquisition debt, the refinanced amount is treated as home acquisition debt, but only up to the amount of the balance of the old mortgage principal just before the refinancing. If you take out equity by refinancing for a higher amount than the outstanding balance and don't use the funds to substantially improve the home securing the debt, then only interest on the refinanced amount is deductible.

When you sell your home, look at the settlement papers to determine the interest charged up to the date of sale so that you don't overlook any interest deduction you may be entitled to claim.

Pitfalls

You cannot deduct your interest if you claim the standard deduction; you must itemize deductions to claim this benefit.

You cannot deduct mortgage fees that you paid to obtain the loan, such as the cost of an appraisal, a credit report, or loan assumption fees. But points paid to obtain the mortgage may be deductible, as discussed later.

You cannot deduct interest on mortgage assistance payments made on your behalf under Section 234 of the National Housing Act.

The IRS has a good idea about what your initial mortgage was because the outstanding mortgage balance at the start of the year and the loan origination date are reported by the lender to the IRS and you on Form 1098.

A married person filing separately has an interest deduction limit on borrowing up to one‐half the applicable dollar limit for acquisition indebtedness (e.g., $500,000 for pre‐December 16, 2017, mortgages; $375,000 for post‐December 15, 2017, mortgages), even if the other spouse does not claim any mortgage interest deduction.

Where to Claim the Deduction

You deduct home mortgage interest on Schedule A of Form 1040 or 1040‐SR. The amount of mortgage interest is reported annually to you by the lender on Form 1098, Mortgage Interest Statement, or for distressed homeowners, Form 1097‐MA, Mortgage Assistance Payments.

Benefit

Even better than deducting your mortgage interest, you may be eligible for a tax credit of up to $2,000 of home mortgage interest paid through mortgage interest certificates. These certificates are issued to certain homeowners as a means of encouraging home ownership. The credit may be claimed regardless of whether you itemize your personal deductions or claim the standard deduction.

If you received a mortgage credit certificate from your state or local government in connection with the purchase or renovation of your main home, you may be entitled to claim a tax credit with respect to your mortgage interest. The amount of the credit is the percentage shown on your mortgage credit certificate multiplied by the lesser of:

• Interest you paid during the year on your actual loan amount
• Interest you paid on the loan amount shown on your mortgage credit certificate

The credit cannot be more than $2,000 if the percentage shown on your mortgage credit certificate is 20% or more.

You must reduce your deduction for home mortgage interest by the amount of any credit you claim.

Conditions

You can claim this tax credit only if you meet 2 conditions:

1. You have received a mortgage credit certificate from your state or local government (“qualified mortgage credit certificate”).
2. Your home meets certain requirements (“qualified home”).

Planning Tips

If you are thinking about buying a home but do not know if you can afford the payments, you may be able to swing a deal if you qualify for this type of government assistance. For information about special financing programs, visit the U.S. Department of Housing and Urban Development at www.hud.gov/buying/insured.cfm.

To find out whether you are eligible for a mortgage credit certificate, contact your local housing or redevelopment agency or ask your local real estate agent for information.

If you qualify for the credit and it exceeds your tax liability without regard to other tax credits, you do not lose the credit. Instead, you can carry the excess amount forward to be used in a future year if you are also eligible for the credit in that year.

If you refinance your mortgage, you do not lose your eligibility to claim the credit if your certificate is reissued and the reissued certificate meets 5 conditions:

1. It must be issued to the original holder of the existing certificate for the same property.
2. It must entirely replace the existing certificate (you cannot retain any portion of the outstanding balance of the existing certificate).
3. The certified indebtedness on the reissued certificate cannot be more than the outstanding balance on the existing certificate.
4. The credit rate of the reissued certificate cannot be more than the credit rate of the existing certificate.
5. The reissued certificate cannot result in a larger amount of interest than is otherwise allowable under the existing certificate for any year.

Pitfalls

You must reduce your deduction for home mortgage interest by the amount of the credit.

If you own your home jointly with a person who is not your spouse, you must divide the credit between the two of you according to your respective ownership interests. If you each own a 50% interest in the home, then you are each entitled to one‐half of the credit.

If you buy a home using a mortgage credit certificate and sell it within 9 years, you may have to repay some of the credit.

Where to Claim the Credit

You figure the credit on Form 8396, Mortgage Interest Certificate, and enter the amount of the credit on Schedule 3 of Form 1040 or 1040‐SR.

If you are subject to recapture of the credit because you sold your home within 9 years of using the mortgage credit certificate, you must complete Form 8828, Recapture of Federal Mortgage Subsidy. You report the recaptured amount on Schedule 2 of Form 1040 or 1040‐SR.

Benefit

When you take out a mortgage, you may pay points to the lender. Points paid to obtain a home mortgage are deductible as part of your itemized interest deduction. However, points in some cases are deductible in full in the year in which they are paid while in other cases they must be amortized (deducted ratably) over the term of the loan.

Conditions

First determine whether the payment qualifies as “points” (defined next). Then see if the points can be deducted in full in the year of payment or must be deducted over the term of the mortgage.

Planning Tips

If you pay points to buy your main home, you are not required to deduct them in full in the year of payment. You can opt to amortize them over the term of the loan. You may wish to make this election if you can't benefit from the deduction in the year of payment. This might occur if you buy your home late in the year and your total itemized deductions do not exceed your standard deduction amount. Another reason to opt to amortize is if your acquisition indebtedness (plus points) in the year you paid the points is over your applicable dollar limit for purposes of deducting mortgage interest.

When you are financing a mortgage and are faced with the option of paying higher interest with little or no points or a lower interest rate but some or substantial points, which option should you select? The answer usually depends on how long you plan to remain in the home (how long you will be paying the mortgage). To help you make this decision based on your circumstances, use a mortgage points calculator (you can find one at www.dinkytown.net/java/MortgagePoints.html).

Pitfall

If you refinance your loan with a new lender and have been amortizing points over the term of a previous loan (for example, this is your second or third refinance), be sure to deduct the remaining balance of the unamortized points.

Where to Claim the Deduction

You deduct points along with your home mortgage interest on Schedule A of Form 1040 or 1040‐SR. There is a separate line on Schedule A to list your points if they are not included on Form 1098 with your other home mortgage interest.

Benefit

If you pay off your mortgage or home equity debt before you are required to, there may be a prepayment penalty as specified in your mortgage papers. Prepayment penalties are treated as deductible interest. They are a set amount of interest: for example, 6 months of interest on 80% of your outstanding loan balance if you pay off the mortgage before a set term (usually one to 2 years). For the rules on deducting interest on your home or second home, see earlier in this chapter.

Conditions

There are no special conditions to meet for deducting prepayment penalties. Simply refer to the rules discussed earlier in this chapter on how to treat mortgage interest.

Planning Tip

Think ahead. When taking out a mortgage, check whether there are any potential prepayment penalties. You may be able to get the lender to delete these from the loan agreement. This is important because you may have to relocate before you had planned and do not want to incur this needless cost.

Pitfall

Don't sign any mortgage loan agreement before finding out if there are prepayment penalties. One common scam by unscrupulous lenders is nondisclosure of prepayment penalties, which can run as much as 6 months of interest on up to 80% of the outstanding loan balance. Such a high penalty can keep you locked into a mortgage when you otherwise could have refinanced for a lower mortgage rate.

Where to Claim the Deduction

Assuming that the prepayment payment penalty is deductible, you claim it with your home mortgage interest on Schedule A of Form 1040 or 1040‐SR. The amount of mortgage interest is reported annually to you by the lender on Form 1098, Mortgage Interest Statement.

Benefit

If you are late in making a payment, you may be charged a penalty by the lender. Generally, penalties for delinquent payments are treated as deductible interest, which can be written off if you itemize your deductions.

Condition

Late payment penalties are treated as deductible interest as long as they are not imposed for a specific service provided by the lender. If they are a flat charge imposed regardless of how late the delinquency may be, they are viewed as a nondeductible service charge rather than as deductible interest.

Planning Tip

Even though late payment penalties can be deductible, you should try to avoid them if possible. The deduction does not fully offset your payment. One way to do so is to arrange for mortgage payments to be debited automatically from your checking account.

Pitfall

Being late on making your mortgage payments can cost you more than late payment penalties. Being late can adversely affect your credit rating and hurt your ability to obtain a loan or even get a job within 2 years or so of the late payment. Usually if your payment is no more than 30 or 60 days late, it likely won't seriously affect your FICO score if it occurs only once or twice, although it may stay on your credit report for about 2 years. However, if you are 90 days late even once, your credit rating will suffer; the late payment will stay on your credit report for up to 7 years.

Where to Claim the Deduction

Assuming that the late payment penalty is deductible, you claim it with your home mortgage interest on Schedule A of Form 1040 or 1040‐SR. The amount of mortgage interest is reported annually to you by the lender on Form 1098, Mortgage Interest Statement.

Benefit

Premiums for PMI paid can be deducted as mortgage interest by those with adjusted gross income below a threshold amount. There is no dollar limit on the amount of the deduction for this expense.

Conditions

To qualify for this itemized deduction, 2 conditions must be met:

1. The insurance must be first obtained after 2006 and through 2022 if the law is extended for this year. This insurance is available through commercial insurers as well as through federal loan programs such as the Veterans Administration (VA), the Rural Housing Administration (RHA), and the Federal Housing Administration (FHA).
2. To claim the full deduction, your adjusted gross income cannot exceed $100,000 ($50,000 for married persons filing separate returns). Any deduction is reduced by $1 for each dollar in excess of the AGI limit; no deduction is allowed if AGI exceeds $109,000 ($54,500 for married persons filing separate returns).

Planning Tip

PMI may be a way to help you buy a home even though you haven't yet saved the full down payment.

Once the equity in your home, from making payments on your mortgage as well as appreciation in property value, reaches 20%, cancel the mortgage insurance.

Pitfall

There is no downside to claiming this deduction if it is extended. But even so, if your acquisition indebtedness is above your applicable dollar limit, you won't be able to deduct your PMI unless it's amortized. Of course, this isn't likely for those with AGI below the limit applicable for deducting PMI.

Where to Claim the Deduction

The deduction is reported on Schedule A of Form 1040 or 1040‐SR.

Benefit

Proceeds received from a reverse mortgage are tax free. There are no dollar limits on the amount that is tax free, but there are limits on how much of a reverse mortgage you can obtain, based on your age, the current interest rate, and the appraised value of your home.

Conditions

To qualify for a reverse mortgage, you must be at least 62 years old and own a primary residence. There are no income limits on eligibility.

Planning Tip

To learn more about reverse mortgages from the U.S. Department of Housing and Urban Development (HUD), go to www.consumer.ftc.gov/articles/0192-reverse-mortgages.

Pitfall

Even though interest accrues on funds borrowed under a reverse mortgage, no deduction can be claimed until repayment is made.

Where to Claim the Benefit

You do not have any tax reporting with a reverse mortgage when you obtain the loan proceeds. You report (and deduct) interest only when you actually pay it. Reporting rules on mortgage interest are explained earlier in this chapter.

Benefit

If you are not personally liable on the mortgage debt, then forgiveness of debt does not result in any income. There are more than a dozen states with anti‐deficiency laws that make the forgiven debt to a homeowner not recourse and, therefore, nontaxable.

If you are personally liable on the debt, forgiveness is treated as tax‐free income within the limits that follow.

Conditions

There are 2 conditions for tax‐free treatment:

1. The forgiven debt must have been used to buy, build, or substantially improve your main home and the debt must have been secured by the home. If a debt has been refinanced, the amount qualifying for this tax break is limited to the mortgage principal immediately before the refinancing.
2. The limit in 2022 on qualifying debt is $750,000 ($375,000 for a married person filing separately).

Planning Tip

Debt forgiveness can apply to a so‐called short sale, which occurs when the amount of the outstanding debt is greater than the value of the home (what a lender would realize if the home were sold). The short sale avoids the need for foreclosure. Also, some lenders will work with a homeowner to reduce the mortgage balance or change the terms of the loan so the homeowner can stay in his or her home. If there is any cancellation of debt, it can be tax free to the same extent as cancellation related to a foreclosure.

Pitfalls

The tax break on forgiven debt does not apply to a second home, rental property, or business property. You may still have to recognize gain if the home was foreclosed upon and the amount realized on the sale is greater than your basis in the home. The fair market value of the property (reported to the borrower in Box 7 of Form 1099‐C, Cancellation of Debt) is treated as the amount realized on the sale. If you sell your home at a loss, you cannot deduct the loss; it is a nondeductible personal loss.

However, if any part of the mortgage is forgiven in conjunction with the sale, the resulting income can be excluded if the conditions stated earlier apply.

Where to Claim the Benefit

Forgiven debt is reported to you by the lender on Form 1099‐C. To claim the exclusion, complete Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (instructions to the form point out the specific lines applicable to home mortgage debt forgiveness). There is no income from debt cancellation to report on the return; just attach the completed Form 982 to the return.

Benefit

You may be able to use money in your IRA toward the cost of buying a home without incurring an early distribution penalty from your IRA. The withdrawal is subject to regular income tax, but you avoid the 10% early distribution penalty on withdrawals before age 59½.

Condition

You can withdraw only up to $10,000 free from penalty from your IRA. This is a once‐in‐a‐lifetime opportunity. If you have already used this break to buy a previous home, you can't use it again.

You must spend the $10,000 on qualified first‐time home‐buying expenses, such as a down payment to purchase a home. These are expenses used to buy, build, or rehabilitate a main home for yourself, your spouse, child, grandchild, or ancestor (parent or grandparent) of you or your spouse. Such person cannot have had an ownership interest in a principal residence within 2 years before the purchase, construction, or renovation of the new home.

Planning Tip

Use this tax break only as a last resort. Once you withdraw the funds from the IRA and spend them on home‐buying expenses, you cannot replace the funds in your retirement savings account. In effect, you lose the opportunity to build up your retirement savings.

Pitfalls

If you take a withdrawal from your IRA with the intention of using the money to buy a home but the sale falls through, you become taxed on the money unless you redeposit it back in the IRA. You have 120 days from your initial withdrawal to redeposit the funds. And, if you're under age 59½, the distribution is also subject to a 10% penalty.

When a couple is buying a home together, each must be a first‐time homebuyer for the penalty exception to apply.

Where to Claim the Benefit

If you take money from your IRA, you must file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax‐Favored Accounts. You report total early distributions from your IRA. You can then subtract those exempt from the 10% penalty because you used them for qualified first‐time home‐buying expenses. You must indicate which exception to the 10% penalty you are relying on (a number is assigned to each exception, and these numbers are listed in the instructions to this form).

Benefit

Your burden of paying local property taxes, including city, town, and/or county taxes and school taxes, can be eased somewhat by deducting your payments.

If you itemize deductions, you can deduct real estate taxes you pay on your main home and any other home you own. There are no limits on the number of homes for which you can claim the deduction. However, the deduction for all state and local taxes, referred to as SALT (real estate taxes, income or sales taxes, and personal taxes) is capped at $10,000 ($5,000 for married persons filing separately). (Congress is considering a change to the SALT cap, so check the Supplement for any update.) The deduction for real estate taxes on your residence and vacation homes is claimed as an itemized deduction (you cannot use this benefit if you claim the standard deduction).

If you pay real estate taxes on a rental property, it is deductible against your rental income, regardless of whether you itemize your personal deductions.

Conditions

You must be the owner of the home so that you are obligated for the payment of the tax. If you buy the property at a tax sale, you cannot start to deduct property taxes until you receive title to the property under state law (typically following a redemption period).

If you pay the seller's unpaid back taxes when you purchase the home, you cannot deduct this payment as your taxes. You can add the payment to your basis in the home used for figuring gain or loss when you sell it.

In the year that property is sold, real estate taxes must be allocated between the buyer and the seller. (Generally this allocation is reflected in your closing papers.)

• The seller can deduct taxes for the portion of the year through the day before the date of sale.
• The buyer can deduct taxes for the portion of the year commencing with the date of sale.

Generally, if you rent rather than own your home, you cannot deduct the portion of the rent that the landlord uses to pay the property taxes. However, in Hawaii you can do so if the lease runs for 15 years or more. Also, as a tenant in California you can deduct your payments if you have your name placed on the tax rolls and agree to pay the tax directly to the taxing authority.

Planning Tips

Consider prepaying an upcoming tax bill before the end of the year to increase your current deductions. For example, you can pay your January 2023 property tax bill in December 2022 to increase your deductions for 2022, assuming this does not put you over the SALT cap explained earlier; you'll likely obtain a discount for paying early.

If you are self‐employed and claim a home office deduction, part of the real estate taxes is taken into account in figuring that deduction. But because of the SALT cap, there are certain computational complications (see Chapter 10).

Ask your city or town whether you qualify for any property tax reductions or rebates. Some areas provide them on the basis of age (reduction for seniors), veteran status, or for some other reason. Some locations even suspend real estate taxes for seniors entirely until the home is sold (e.g., when the owner dies or relocates). Generally, a reduction or rebate is not automatic; the homeowner must apply for it. The amount saved because of a property tax reduction or rebate is not treated as income; it merely lowers the amount you pay for real estate taxes and, in turn, the amount of your itemized deduction for real estate taxes. If you are a distressed homeowner who receives assistance from HAF to pay your real estate taxes (and certain other expenses), use the IRS safe harbor to determine the extent of payments you make that are deductible. This safe harbor is explained earlier in this chapter (see Home Mortgage Interest).

Pitfalls

If you make payments to the lender that are held in escrow and disbursed to the taxing authority, you can only deduct real estate taxes when the lender makes the disbursements (not when you pay the lender).

If the title to your home is in the name of one spouse and the other spouse pays the real estate tax bill, the deduction can be claimed only if you file a joint return. Since the party paying the tax isn't the legal owner of the home, the tax may not be deducted on a separate return.

Special assessments by homeowners associations for the purpose of maintaining common areas or special assessments by municipalities for certain government services (water, sewage, or garbage collection) are not deductible as real estate taxes.

Do not prepay real estate taxes if you itemize and are subject to the alternative minimum tax (AMT). Since taxes are not deductible for AMT purposes, prepaying them can trigger or increase your AMT liability. You effectively lose the benefit of claiming the deduction.

If you receive a homestead tax credit from your state based on a percentage of your real estate taxes, the IRS says that the credit is treated for federal tax purposes as a reduction in your state income tax. This limits the amount of state income tax you can claim as an itemized deduction on your federal income tax return; it doesn't change your deduction for real property taxes.

Some states have tried to create workarounds for the SALT limit using charitable contribution deductions. The IRS has nixed the charitable contribution workaround, other than for a de minimis amount (see Chapter 6).

Where to Claim the Deduction

You deduct your payment of real estate taxes on your residence and vacation homes as an itemized deduction on Schedule A of Form 1040 or 1040‐SR. You deduct real estate taxes on rental properties on Schedule E of Form 1040 or 1040‐SR.

In the year you sell property, if your share of real estate taxes is paid in advance by the buyer, the lender or real estate broker will generally include this information on Form 1099‐S, Proceeds from Real Estate Transactions. But this form is not required to be filed for all sales, so you should keep track of this information (check your settlement papers).

Each year that you own property you do not receive any official information return notifying you of the amount of taxes you paid during the year. As a practical matter, if you make payments to a commercial lender to cover real estate taxes, your annual tax payments will be detailed in a year‐end statement sent to you by the lender.

Benefits

You may experience 2 levels of deductions—one that is allocated to you from the CHC and the other that you obtain through your direct payments. For example, you may incur 2 interest deductions—one for your share of interest on debt of the CHC (e.g., for common areas) and one for the purchase of your unit that you financed through a bank. This section discusses only your allocated deduction; deductions for your direct payments are included in other sections of this chapter (e.g., home mortgage interest).

Condition

The only condition for claiming a deduction for CHC expenses allocated to you is ownership of shares in the CHC.

Planning Tip

Tenant‐stockholders in cooperative housing corporations are usually treated the same in the tax law as homeowners of condominiums and single‐family homes.

Pitfalls

While a tenant‐shareholder of an apartment in a cooperative housing corporation can deduct his/her share of the co‐op's real estate taxes, a federal appeals court has decided that these taxes are not deductible for purposes of the alternative minimum tax (AMT). Even though the AMT rules do not specifically bar a deduction, these taxes are treated in the same manner as if the taxes had been paid directly by the owner of a single‐family home. There had been speculation that coop owners could skirt the SALT cap. However, an IRS letter to a Congressional office said that the limit on deducting state and local taxes applies to taxes allocated to coop owners and deducted on their returns.

Where to Claim the Deduction

You claim a deduction for your share of the CHC's mortgage interest and real estate taxes allocated to you on Schedule A of Form 1040 or 1040‐SR as a “Miscellaneous Itemized Deduction,” which is deductible in 2022 because it is not subject to the 2%‐of‐AGI limitation.

The CHC should provide you with Form 1098, Mortgage Interest Statement, to show your share of these expenses.

Benefit

You are not taxed on the rental value of a home provided to you by your religious institution—this is tax‐free income to you. If you receive an allowance for housing, you can exclude the amount used to pay rent, make a down payment to buy a house, or make mortgage payments, or for utilities, real estate taxes, or repairs to the home. There is no dollar limit on this exclusion.

Conditions

You must be a duly ordained minister and acting in that capacity. A rabbi or cantor is treated as a minister for purposes of this exclusion. Retired ministers can qualify for the exclusion if the housing allowance is made in recognition of past services. A minister acting as a teacher or an administrator of a parochial school or seminary qualifies for the exclusion if the school is an integral part of a church organization.

Church officers who are not ordained cannot qualify for the exclusion. Ordained ministers who are working as executives of nonreligious organizations cannot claim the exclusion even if they perform religious duties. For example, a minister‐administrator of an old age home not under church authority could not claim the exclusion.

The religious institution (e.g., church or local congregation) must designate the part of your compensation that is the housing allowance. This designation must be made in advance of the payments to you. Designation can be made in an employment contract, minutes, a resolution, or a budget allowance.

Planning Tip

If you pay mortgage interest and/or real estate taxes, you can claim deductions for these payments even if you finance them with the tax‐free housing allowance. You must itemize your deductions to write off mortgage interest and real estate taxes on your home, as explained in this chapter.

Pitfalls

Even though the housing exclusion is not subject to income tax, it is treated as self‐employment income for purposes of Social Security and Medicare taxes. If you use a church‐provided home tax free, figure the rental value for purposes of self‐employment taxes at what you would pay for similar quarters in your area, including utilities and garage or parking space, if any.

Claiming the housing allowance can have an adverse impact on your business deductions. The portion of business deductions allocable to the tax‐free housing allowance is not deductible.

Where to Claim the Exclusion

If you can exclude the benefit, you do not have to report anything on your return. If you receive an allowance in excess of the amounts used for housing expenses, you must include the excess as part of your salary reported on Form 1040 or 1040‐SR.

Benefit

If you sell your home for a profit, you may avoid tax on some or all of your gain as long as you meet certain conditions. More specifically, you do not pay any tax on a gain up to $250,000 from the sale of your home ($500,000 on a joint return or by a surviving spouse if the sale is within 2 years of the other spouse's death) if you owned and used the home as your main residence for at least 2 of the 5 years preceding the date of sale. The amount you exclude is tax‐free income to you.

Conditions

To be eligible to use the full exclusion amount of $250,000 ($500,000 on a joint return or for a surviving spouse), you must meet all 3 conditions:

1. The home must be your main home (“principal residence”).
2. You owned your home for at least 2 years prior to the sale.
3. You used your home as your main home for at least 2 years prior to the sale.

If you acquired your home in a tax‐free exchange, the ownership and use periods must be 5 full years (instead of 2 of 5 years) before qualifying for the exclusion.

If you are a member of the uniformed services, Foreign Service, or intelligence community, or are a Peace Corps volunteer, you can elect to suspend the 5‐year testing period for the ownership and use tests for up to 10 years.

Planning Tips

If you have owned your home for a long time and paid down the mortgage, your gain may exceed your exclusion amount. You can minimize your gain by adding to the basis of your home any capital improvements you've made to it.

Pitfalls

The home sale exclusion applies only to “qualified use” of a residence. “Nonqualified use” includes any period after December 31, 2008, in which the home is not used as a principal residence. Thus, if you stop using the home as your main home and use it only as vacation property, or if you rent it out, gain related to this period does not qualify for the home sale exclusion. Temporary absences are not treated as nonqualified use; they're disregarded.

If you have been claiming a home office deduction for a portion of your home, you must recapture depreciation you have claimed for the office after May 6, 1997. This is so even though you can use the exclusion for gain on this part of the home. “Recapture” means you pay tax on all the depreciation claimed after May 6, 1997, at the rate of 25% (assuming your tax bracket is at or above this rate). Home office deduction rules are discussed in Chapter 14.

You must reduce the basis of your home by the amount of any energy credit claimed.

If you fail the 2‐year ownership and use test, you cannot claim a partial home sale exclusion based on unforeseen circumstances merely because a job promotion, house appreciation, or winning the lottery enables you to buy a bigger home.

Where to Claim the Exclusion

If your gain is fully excludable, you do not have to report the sale of your home on your return. If, however, some of the gain is taxable because it exceeds the exclusion amount (or all of your gain is taxable because you opt not to use the exclusion), you report the sale on Form 8949, Sales and Other Dispositions of Capital Assets, which is carried over to Schedule D and then to Form 1040 or 1040‐SR.

You can use a worksheet in IRS Publication 523 to figure your gain and whether any portion of the gain is excludable.

Benefit

If you are member of the U.S. Armed Forces, you can deduct your moving expenses as an adjustment to gross income, even if you don't itemize your other personal expenses. If you are reimbursed or receive an allowance for moving expenses, you are not taxed on these payments. There is no dollar limit on this benefit.

Deductible amounts include amounts paid to pack, crate, and move your household goods and personal effects. Storage and insurance costs can be treated as deductible expenses for any period within 30 days after the items were moved from your old home but before they were delivered to your new home. If you are stationed overseas, there is no limit on storage and insurance costs while you work at your overseas location. The cost of connecting or disconnecting household appliances is a deductible moving expense, but the cost of installing a telephone in your new home is not deductible.

Deductible amounts also include travel expenses for you and members of your household.

Condition

To be treated as a deductible expense (or to qualify for an exclusion for reimbursement or an allowance for moving expenses), you or your spouse must be on active duty and the move must be because of a military order and incident to a permanent change of station.

Planning Tip

Even if you can deduct your moving costs, it still makes sense to keep them as low as possible. When planning a move, to get a rough idea of moving costs, get an estimate using a calculator from Moving.com (https://www.moving.com/movers/moving-cost-calculator.asp). Be sure to get several binding quotes from reputable moving companies before contracting with one of them. Finally, put everything you agree to in writing and include adequate insurance for loss, breakage, and other damage. Learn about moving, including how to insure the move, in The Moving Guide from MovingGuru (www.movingguru.com).

Pitfalls

Even if you are in the military and move because of a military order, not every move‐related expense is deductible.

Where to Claim the Deduction

If your employer (the federal government) pays your moving costs and you are eligible to exclude this benefit from your income, you do not report them on your return.

If you deduct your expenses, figure the deduction on Form 3903, Moving Expenses, which you attach to your return. Enter the deductible amount on Schedule 1 of Form 1040 or 1040‐SR.

Benefit

There are 2 tax credits that a homeowner may claim for making certain energy improvements to the home. These include a 30% credit for adding qualified energy efficiency improvements (called the energy‐efficient home improvements credit) and a 30% credit for solar energy and fuel cell power plants.

Conditions

The law requires that these improvements meet certain energy‐saving standards and cannot exceed certain dollar limits. Different requirements apply to energy improvements and to solar energy and fuel cell power plants.

The qualified improvements must be made to an existing home, not a home that is being constructed. The home must be your principal residence and not vacation property.

Planning Tips

How can you know whether improvements to your home will qualify for these tax credits? Obtain a manufacturer's certificate that the item has been approved by the IRS as qualifying for the credit. You can find helpful information at www.EnergyStar.gov.

The residential clean energy credit can be claimed even for expenditures made with funds obtained from subsidized energy financing. The value of any subsidy provided by a public utility is excluded from gross income, but this must be used to reduce the basis of the energy improvement for purposes of figuring the credit.

Low‐ and middle‐income homeowners who receive payments from the state to help pay for energy‐efficient boilers and furnaces are not taxed on these payments (the state is not required to report them on Form 1099).

If you can't fully use the credit for clean energy improvements in the current year, you can carry the unused credit forward; there is no limit on this carryforward period.

Check with your utility company to learn whether there are any grants or rebates for making energy improvements to your home.

Pitfalls

Not every energy‐saving measure qualifies for a credit. For purposes of the energy‐efficient home improvements credit, insulated vinyl siding does not qualify. For purposes of the residential clean energy credit, no part of a solar or fuel cell power plant can be used to heat a pool or hot tub.

You must reduce the basis of your home by the amount of any energy credit claimed. For example, if you claim a $200 tax credit in 2022 for installing new windows, you must subtract $200 from the basis of your home for determining gain or loss on the sale of the home in the future.

Where to Claim the Credits

You figure the credit on Form 5965, Residential Energy Credits. The credit is then entered on Schedule 3 of Form 1040 or 1040‐SR.