With tax season upon us, we thought we’d share some information about tax breaks for Colorado homeowners. Most Colorado homeowners are eligible for at least a couple; however, taking full advantage means you have to itemize using the Schedule A (Form 1040) to detail your tax-deductible expenses.
If this is your first go at itemization, it might help to complete your taxes twice—once with standard deductions and a second time with itemized deductions and see how you fare each way. If you decide to itemize, here are some Colorado homeowner tax deductions that may apply.
1. Mortgage Interest
Your biggest write off will be the monthly payment you make on your Colorado home. This is because the majority of your monthly mortgage payment goes toward interest—and all that interest is tax deductible. That is, unless your loan is more than $1 million. If you’ve refinanced your home this year or took out a home equity loan or line of credit, you may qualify for additional tax breaks. Typically, equity debts under $100,000 are fully deductible.
Do you own more than one property? As long as you spend at least 14 days there, or more than 10 percent of the number of days you rent it out—whichever is longer—the mortgage interest on a second home (RV, or any structure with cooking, sleeping and bathroom facilities) is also fully deductible. If you’re a landlord, there are different guidelines for Colorado residential rental property.
2. Loan Points
Colorado homebuyers often have the option to pay points and get a loan with a lower interest rate. Generally, the buyer pays the points, each equal to one percent of the loan amount, at closing. Loan points that meet the IRS requirements are fully deductible in the same tax year as your closing.
If you refinanced this year, you don’t get to apply the entire deduction at once. Instead, you’ll need to break it up over the life of your loan.
3. Home Improvement Loan Interest
Did you take out a loan this year to make large-scale, “capital” home improvements? The interest on your loan is tax deductible with no dollar limit. “Capital” improvements are those that increase your home’s value, extend its longevity or modify it for a new use—things like replacing the roof, adding a swimming pool or making your home handicap accessible.
What about all the little repairs you make while living in your house? Those aren’t tax deductible right now, but hang on to the receipts. In the current Colorado real estate market, homes are appreciating significantly, often more than the tax-free amount ($250,000 for individuals and $500,000 for married couples filing jointly). Should you get so lucky, the records of the property improvements you made may help lower your taxable gain.
4. Colorado Property Taxes
A large portion of most monthly mortgage payments goes into an escrow account to pay property taxes once a year. The amount you pay annually toward taxes should be listed on the annual statement from your lender and will be an annual deduction as long as you own your property.
Is this the first year in your home? When the seller transferred the property to you, the year's tax payments were split between you; you each paid taxes for the period you owned the home. Whatever your share, it’s fully deductible. Check the settlement sheet you received at closing for that information.
5. Sale of a Colorado Home
Since 1997, sale proceeds up to $250,000 or $500,000, if you’re married and filing jointly, are tax-free. To get this benefit, you must have owned the home for two years and lived there two of the five years prior to the sale. If you don’t meet the ownership and residency requirements but are forced to sell your Colorado home due to what the IRS considers “unforeseen circumstances,”they will offer some relief by prorating the amount of tax-free proceeds.
We always advise our clients to consult a tax accountant, especially for people itemizing for the first time. And, we'll always look out for your financial interests, whether you are buying or selling a home in Colorado. Our agents are ready and waiting to help. Give us a call or fill out our form today.