Home improvements for tax deductions to consider

Home improvements that qualify for tax deductions typically fall into one of these four categories:

• Renovations for medical conditions
• Eco-friendly home upgrades
• Home office additions
• Improvements made to sell your home

However, as with all things taxes, it’s not that simple. Which home improvements are tax deductible depends on the scale of the project, how you use the renovated space, and more detailed criteria. Plus, some states may have different tax requirements than others. With that in mind, let’s get into what you can generally expect to qualify.

Renovations for medical conditions

Accessible home modifications are often eligible for tax deductions. These include medically necessary home improvements intended to make the home livable for a person with a disability who resides in the home.

Common deductible home improvements for accessibility

• Widening doorways
• Installing stair lifts and ramps
• Installing voice-activated control systems
• Installing handrails and grab bars throughout the home
• Converting standing showers and tubs to include accessible seating

Eco-friendly home upgrades

In case helping out the planet (and lowering your utility bill) wasn’t incentive enough to go green, many home improvements for energy efficiency can help you qualify for more tax deductions. Barring very few exceptions, these deductions can only apply to your existing home, not a new home you’re constructing from the ground up. 

Common deductible home improvements for energy efficiency

• Installing ENERGY STAR-rated doors and windows
• Installing ENERGY STAR-rated appliances
• Installing solar panels
• Replacing insulation materials

Pro Tip: What does an ENERGY STAR rating actually mean? ENERGY STAR-rated products meet strict energy efficiency standards set by the US Environmental Protection Agency. Learn more here.

Home office additions

If you run a business from home, you may be able to deduct that space from your taxes. In general, your home office needs to be an exclusive part of your home that you use only for conducting business on a regular basis. Your home office should also be your principal place of business. If you spend 9-to-5 at a storefront and use your home office to catch up on overtime tasks, that home office space likely won’t qualify. 

Common deductible home improvements for your home office

• Installing new equipment needed for work (such as a new printer)
• Renovations made to your entire home that impact the office (such as new floors throughout)
• Repairs made to the office exclusively

Pro Tip: Most home office tax deductions are based on the percentage of your home’s square footage that the office occupies. So, first things first, bust out that measuring tape.

Improvements made to sell your home

If you sell your home for more than you paid for it, that’s called capital gain. And in tax world, capital gain is, you guessed it, taxable. Luckily, it’s possible to reduce the amount you’re taxed for that capital gain based on how much money you invested in the home. Even if those renovations weren’t necessarily made with a sale in mind at the time, you could still qualify. 

Common deductible home improvements for home sales

• Structural additions, like a new garage
• Landscaping installations, like a swimming pool or firepit
• Plumbing or HVAC upgrades
• New flooring

As a general rule of thumb, upgrades required to maintain the livability of your home do not qualify. For example, the cost of repairing a leak in the ceiling won’t be eligible for a deduction.

Other potential home improvements for tax deductions

If you own a rental property, home improvements generally are not deductible. However, you may be able to deduct the cost of necessary repairs to the property. Whether or not a home improvement project on a rental property is considered deductible essentially comes down to whether that repair was necessary to make the home livable (deductible) or whether it was simply enhancing the space (not deductible). Additionally, you should look into specific state or local tax deductions for home improvement projects. Depending on where you live, you may have more options than you think.

Bottom line? Homeownership can offer so much more than just a place to live. Tax deductions for home improvements are just one way to make the most of your investment.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

Not only can renovations boost your home’s value, but some projects could qualify you for more tax deductions.

The post Top Home Improvements for Tax Deductions appeared first on Cardinal Financial.

Depending on the date of closing, the amount of property tax that a homebuyer and seller are responsible for will vary. The process of figuring out who pays how much is called tax proration, and it’s one cost that many buyers overlook when calculating their cash to close.

What is tax proration?

Tax proration is when property taxes are fairly divided between buyer and seller based on the date of ownership transfer or closing.

Simply put: Tax proration helps level the playing field. Property taxes on homes are often billed at the beginning of the calendar year for the year prior. So in 2024, you’d get a property tax bill for 2023. Let’s say you bought and closed on a home in November 2023. Should you be responsible for the property taxes owed on that home for the months before closing? Didn’t think so. Enter tax proration. 

Tax proration involves a bit of math to figure out how much of the bill each party is responsible for. Here’s where it gets more complicated: Homeowners (or the sellers) don’t typically pay their part of the property tax bill directly. Depending on the date of closing, or the particular situation, you have a couple of payment options to consider.

How to pay property taxes with tax proration

Tax proration pro-tips

Before you close on your home, keep these three tips in mind.

• Leverage: Depending on the market, the property tax bill could be used as leverage. In a seller’s market, where there are tons of competing bids, motivated buyers might offer to pay the seller’s portion of property taxes to get a leg up on the competition or expedite the sale. In a buyer’s market, the seller might offer to pay the entire property tax bill in exchange for coverage of other closing costs.
• Exemptions: Age and disability status could come with tax implications, for yourself or the sellers. Those implications affect tax responsibility. For example, perhaps the seller is a disabled senior citizen. Local laws might have provided relief for that person—relief that is unlikely to be passed on to the buyer. Communicate with your team to determine potential roadblocks.
• Projects: New builds, rehabilitation, and renovations will result in different tax assessments. New builds may not have received a tax assessment at the time of closing, and since there was no previous owner, the buyer would be responsible for an entire year’s worth of taxes. Rehab and renovation projects increase a home’s value, which could result in an increased tax bill. Make sure your assessment is up-to-date to avoid any surprises.

How to pay property taxes post-proration

After you’ve calculated and paid your initial prorated tax bill, you’re responsible for annual state and local property taxes for as long as you own the home. You may be able to deduct those property taxes (up to a certain amount) when it comes time to file your tax returns. Individually, you can deduct up to $5,000 in property taxes. Filing jointly? Double that figure and enjoy a $10,000 deduction.

Keep in mind that property taxes vary depending on where you live and other factors, so there’s no single correct way to go about it. Consult a tax professional, do your research, and don’t take shortcuts as you take on this part of homeownership. Ok, now that we got the serious part out of the way: Deep breath. You’ve got this!

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

The post Tax Proration: How to Pay Property Taxes Like a Pro appeared first on Cardinal Financial.

What Is a CEMA Loan?

CEMA stands for Consolidation Extension and Modification Agreement. For homeowners in the state of New York who are looking to refinance, it’s a process that can help them save money on their mortgage taxes. 

• Consolidation means the combining of two mortgages (the existing mortgage and the gap mortgage) into one.
• Extension refers to the note, aka the document you sign at closing that details your loan terms. If the mortgage has less than 30 years left on it, it will likely be extended to match the term of the new loan. 
• Modification means that the terms of the old mortgage are being modified through the CEMA according to the terms of the new loan.

Wait, what’s a gap mortgage? When you’re refinancing your home loan, you’ll have the principal unpaid balance (PUB) on the existing loan and the “gap” amount. The gap amount is the difference between the PUB and the new loan amount. The PUB is secured by the existing mortgage and assigned to the new lender. The gap amount, however, is secured by the gap mortgage, which is recorded after closing. In the end, both mortgages are consolidated to form one lien through the CEMA.

Why get a CEMA loan?

CEMA loans can help homeowners in the state of New York avoid paying all or some of the mortgage tax on their refinance. Especially if your tax savings outweigh the cost to get a CEMA, you could save some serious cash. Savings are based on the mortgage tax rate in the borrower’s county, the principal unpaid balance on their existing loan, and the fees they incur in obtaining the assignment. The assignment is required and charged by the borrower’s payoff bank in order for the CEMA to take place.

In the mortgage world, assignment is when the original lender transfers the loan to a new lender. This means your payments will start going to that new lender. When you close on your home loan, you may be asked to sign a document that gives your lender the right to assign your mortgage to a different lender. Even though the lender changes when your mortgage is assigned, the terms you agreed to when you closed on the loan won’t change.

What are the downsides to a CEMA loan?

If you opt for a CEMA loan when you refinance your mortgage, you may have to pay an upfront fee to initiate the CEMA, and it may not be refundable. This can be a drawback to borrowers, especially when you’re refinancing—and doing a CEMA—to save money. For some, it can feel like one step forward, two steps back. But, if the tax savings outweigh the cost of the upfront fee, it may still be worth it.

How does a CEMA loan refinance work?

When you take out a home loan, you’ll need to file the mortgage deed with your county. This is called recording. When the mortgage is recorded, the mortgage tax is assessed. The majority of the time, the existing loan in a refinance transaction is paid in full. Once the old lender is paid off, they will provide a satisfaction for the mortgage, or “discharge” it. In New York, when you satisfy a loan upon payoff and record a new mortgage under a new lender, you will incur a mortgage tax on the full amount of the new mortgage.

If the old lender is willing to assign the mortgage to the new lender, the borrower doesn’t need to record a full-on new mortgage. In that case, they really only need to record a mortgage for the difference between the loan amount and the PUB. This is typically a much smaller amount, therefore, the tax is much less.

The key to the CEMA loan process is that the existing lender assigns the mortgage to the new lender instead of satisfying it. In other words, you don’t pay off the current loan and take out a new one like you would in a typical refinance. Instead, the debt is simply transferred to a new lender, but it is still the same loan. This is why CEMA loans are sometimes called “New York Assignments.”

How to calculate your CEMA loan refinance

The money you can save with a CEMA loan can be calculated like this: Take the principal unpaid balance from your current home loan and multiply that number by your county mortgage tax rate. From that, subtract the bank and recording fees. Your loan originator or financial advisor can also help you crunch the numbers.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

CEMA stands for Consolidation Extension and Modification Agreement. If you’re a New York homeowner looking to refi, it can help you save money on your mortgage taxes.

The post CEMA Loans: What to Know Before You Refinance in New York appeared first on Cardinal Financial.

We’ve said it before, but it’s often cheaper to buy than rent. But once someone becomes a homeowner, they may come to find that there are some new things they have to pay for. Things they didn’t have to worry about when they were renting. Like property taxes. But this added expense shouldn’t scare people away from buying a home just yet. There’s a little thing called a homestead credit that’s intended to lighten the burden of property tax payments.

It’s just another benefit that can help make homeownership affordable. A homeowner who pays property taxes on their primary residence might want to consider taking advantage of this program. However, not all homeowners are guaranteed to save money via the homestead credit program or to even be eligible for it. It’s best for a homeowner to start by contacting their local government and research the homestead credit rules specific to their individual situation.

The homestead credit is just another perk to homeowners and another benefit that can help make homeownership affordable.

let’s get down to the PITI-gritty

Before we get into the details of the program, let’s talk about PITI. Four things make up a mortgage payment: principal, interest, taxes, and insurance (abbreviated PITI). The principal and interest pieces of that equation concern the home loan. The borrower pays the insurance part to their homeowners insurance company. Then there’s taxes. This part of a monthly mortgage payment goes toward property taxes—that’s where the homestead credit comes in.

homestead credit for dummies

“Homestead” is just an old-fashioned word for a home—more specifically, a homeowner’s primary owned residence. In the U.S., the homestead tax credit law limits the amount of tax assessment increase that can be imposed on homeowners. The program is currently available in 47 states, six of which have unlimited exemption. Other states limit it to a percentage or a fixed amount.

The homestead credit may protect at least some of a home’s value from creditors, property tax increases, and even life events like the death of a spouse by putting a cap on the assessment increase for a period of time. This credit (also called homestead tax credit or homestead tax exemption) can have a significant impact on how much homeowners save on property taxes, regardless of their property value or their income level.

home values 101

Let’s take a step back for a minute. The amount a homeowner pays for property taxes is based on factors that impact their home’s market value. When home values rise, property taxes usually do so too.

One major factor that can affect a home’s value is home renovations. And not just renovations a homeowner makes to their own home, but those their neighbors make to their homes too. Picture Homeowners A and B. Let’s say Homeowner A builds an addition onto their home. This not only increases the value of Homeowner A’s home, but Homeowner B’s too, and that of the whole neighborhood. Making improvements around the house can increase the home values in the surrounding neighborhood. And it can increase the property taxes of the area as well.

Local demands can also affect home values and property taxes. Since property taxes often fund public services in the community like public schools or parks, homeowners in the area could pay higher property taxes to support these local establishments. Similarly, if there’s a lot of real estate investing going on in the area, homeowners might have to pay more in property taxes to help fund those initiatives.

Making improvements around the house can actually increase the value of the surrounding neighborhood.

All about tax assessments

Did you know that property taxes are assessed every so often? The frequency of this depends on a homeowner’s local government. However, they can be reassessed annually, every five years, or only when the home is sold or refinanced. The local government assesses property taxes based on an assessment rate (also called a mill levy) set by the state. But just what is evaluated when a piece of property is assessed for taxes?

An official tax assessor will compare the market value of the home to similar properties in the area. The home’s worth will then be determined by the amount that those similar, nearby properties were recently appraised or sold for. If home renovations and local demands are on the rise, the property taxes could go up. This is where the homestead credit program can cap the property assessment increase for a period of time to give the homeowner a financial break.

The homestead credit can cap the property assessment increase for a period of time to give the homeowner a financial break.

homeownership has its perks

Homeowners across the country save money and benefit from the homestead credit. The application process helps verify that the property owners only receive the benefit of this credit on their principal residence. In addition, once a person submits the application, homestead credit eligibility stays in place as long as the home for which they’re applying remains their primary residence.

While there are different rules and processes for every state, the overall benefit remains the same: homeownership has its perks. And saving money on property taxes using the homestead credit is one of them. If there’s money to be saved, it can’t hurt to do some research and consider filling out an application. Savings via the homestead credit is not guaranteed to every homeowner, so it’s important to talk to your local government or visit your state’s .gov website to find out if you’re eligible and where to apply.

This blog post is intended for educational purposes only and is not to be taken as advice or as a guarantee of savings. Consult your financial advisor or legal counsel before you make any financial decisions toward purchasing a home or applying for the homestead credit.

Did you learn something new about the homestead credit from this blog post? Give us a shout-out on social media!

The post Homeowners Catch a Break with the Homestead Credit appeared first on Cardinal Financial.