Tax Tips for Homeowners Looking Ahead to 2010 Returns

Guest Blogger: Mike DeSenne

Originally Published: February 22, 2010

From energy tax credits to vacation home deductions, check out these tax tips for homeowners looking ahead to 2010 returns.

Claim remaining energy tax credits

It's time to get cracking if you didn't exhaust your full allotment of residential energy tax credits during 2009. Although tax credits for big projects like residential wind turbines and solar energy systems have no upper limit and are good through 2016, energy tax credits capped at $1,500 expire at the end of 2010. Eligible capped projects include new windows and doors, insulation, roofing, water heaters, HVAC, and biomass stoves.

Here's how it works with capped federal credits: You can earn energy tax credits worth 30% of the cost of qualifying improvements, but the total tax credits can't exceed $1,500 combined for 2009 and 2010. So if you only took, say, $700 worth of capped energy credits on your 2009 tax return, you're still due for another $800 in credits in 2010. Some projects include the cost of installation--a furnace, for example--while others, such as insulation, are limited to the cost of materials.

Max out tax benefits of a vacation home

Use a vacation home wisely, and it'll provide a break from taxes as well as the hustle and bustle of everyday life. The rules on tax deductions for vacation homes can get a bit tricky, but understanding and adhering to them can yield many happy tax returns.

If your vacation home is truly a vacation home meant for your personal enjoyment, as opposed to a rental-only income property, you can usually deduct mortgage interest and real estate taxes, just as you would on your main home. You can even rent out the home for up to 14 days during the year without getting taxed on the rental income. Not bad.

Now, let's say you want to rent out your vacation home for more than 14 days in 2010, but also use it yourself from time to time. To maximize the tax benefits, you need to keep tabs on how many days you use your vacation home. By restricting your annual personal use to fewer than 15 days (or 10% of total rental days, whichever is greater), you can treat your vacation home as a rental-only income property for tax purposes.

Why is that a big deal? In addition to mortgage interest and real estate taxes, rental-only income properties are eligible for a slew of other tax deductions for everything from utilities and condo fees to housecleaning and repairs. Deductions are limited once personal use exceeds 14 days (or 10% of total rental days), so get out your calendar now to strategically plot your vacations.

Take advantage of tax breaks for the military

In salute to members of the armed forces serving overseas who want to purchase a home, the IRS is extending a lucrative tax perk for military personnel. If you spent at least 90 days abroad performing qualified duty between Jan. 1, 2009, and April 30, 2010, you have an extra year to earn a homebuyer tax credit. In addition to uniformed service members, workers in the Foreign Service and in the intelligence community are eligible.

Thanks to this extension of the homebuyer tax credit, qualifying military personnel have until April 30, 2011, to sign a contract on a new home. The deal must close before July 1, 2011. Just like non-military buyers, first-time homebuyers can earn a tax credit worth up to $8,000, and longtime homeowners can earn a credit of up to $6,500. The same income restrictions and $800,000 cap on home prices apply.

Military personnel can also get a break if official duty calls and they're forced to move for an extended period. Normally, the homebuyer tax credit needs to be repaid if you sell your home within three years, but this requirement is waived for uniformed service members, Foreign Service workers, and intelligence community personnel. The new extended duty posting doesn't need to be overseas, but it must be at least 50 miles from your principal residence.

Challenge your real estate assessment

You can't do much about the rate at which your home is taxed, but you can try to do something about how your home is valued for taxation purposes in 2010. The process varies depending where you live, but in general local governments conduct a periodic real estate assessment to determine how much your home is worth. That real estate assessment figure is used to calculate your property tax bill.

You can usually appeal your real estate assessment if you think it's too high. Contact your local assessor's office to find out the procedure, and be prepared to do some research. There's often no charge to request a review of your assessment.

Look for errors. You probably received an assessment letter in the mail, and many local governments provide the information online as well. Make sure the number of bedrooms and bathrooms is accurate, and the lot size is correct. Also check the assessed value of comparable homes in your area. If they're being assessed for less than your home, you might have a case for relief.

Even if your assessment is accurate and comparable homes are being taxed at the same rate, there might be another route to tax savings. Ask your assessor's office about available property tax exemptions. Local governments often give breaks to seniors, veterans, and the disabled, among others.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.

Mike DeSenne is Online Managing Editor for taxes, finances, and insurance at HouseLogic.com, and the former Executive Editor of SmartMoney.com. He likes to do his taxes by hand, much to the dismay of his accountant.

We Agree - Now is a Great Time to Buy Real Estate - So What Are Steve Harney and I Debating About?

Recently, the KCM Crew at my favorite real estate blog, Keeping Current Matters, posted an article called "The First Question You Should Ask Your Listing Agent".

The answer to that eponymous question was "Do you truly believe that now is a good time to buy a home?" The author went on to explain that the listing agent should be able to convince a potential buyer that now is a good time to buy a home, and thereby "find a listing agent who truly believes that someone should buy your home – TODAY". (Underline emphasis added by me.)

I agree with the first part of that statement - the listing agent needs to be able to respond intelligently to questions about the market, and in my opinion (and that of the KCM Crew) this is clearly an incredible time to buy a home.

The second part of the statement I took issue with, and in fairness, perhaps I was being a little too literal, or overly analytical. That said, I think there is a good message in here about what home sellers should expect that a listing agent (even the "best" listing agent) can and cannot do. Here was my reply to the article:

With regards to “If an agent doesn’t believe that, how will they be able to convince a potential buyer to buy your home?”, how does anyone CONVINCE another person to buy a specific home? Have you ever tried it?

The way to convince a buyer to buy “your home” is to make it the nicest product they can afford in their price range – that means pricing to compete, and improving/staging the home so that it shows to its fullest potential.

A listing agent cannot point out a view or a cabinet finish or a counter top quality that will impact a buyers emotional reaction to a home. In fact, 100% of home buyers I’ve surveyed (anecdotal, I realize) have indicated that they cannot stand hearing from the listing agent at all – “just let me look at the home and draw my own conclusions.”

The listing agent’s job is to educate the home sellers to make their home market-ready, to price it competitively, to negotiate with skill and knowledge (while removing as much emotion as possible), and to ensure that the contract gets to the closing table by staying on top of lenders, post-inspection negotiation, attorneys, and so on….

In my opinion, any conversation between the listing agent and the home buyers should be about the weather, anything related to the transaction would be inappropriate. The listing agent represents the seller, most conversations with the buyer fall into the categories of inappropriate, based on their obligation to the seller, or misleading, attempting to educate the buyer with the sellers actual best interests in mind.

I was pleased to see that nationally-recognized real estate speak, and KCM founder, Steve Harney replied to my comments directly:

Great points, Jason! However, there are many situations when a listing agent might have a conversation with a buyer. Here are a couple:

1. At an Open House on a listing, a buyer says he likes the house but is not sure now is the time to buy. Wouldn’t you talk to that buyer?
2. Same scenario on an incoming call on an ad for the house. Wouldn’t you talk to the buyer?
3. On a presentation of an offer to purchase, the selling agent tells you the buyer wants to wait because he knows prices are still falling. Wouldn’t you coach the agent on why it might not make sense for any buyer to wait in today’s market? The agent then would use your words in coaching the buyer.

I can think of dozens of other situations. Your fiduciary responsibility to one party in a transaction does not prevent you from giving good, honest advice to the other side of the transaction.

Steve

Of course, Steve is correct, and I think we are in harmony on much of this - "violent agreement" as my old UK colleagues used to say.

A good listing agent can educate the general public, be they clients, potential customers, or the average consumer, about the facts supporting the premise that now is, indeed, a great time to buy real estate. An aware home seller will realize that their listing agent cannot "sell" a home, in the sense that pointing out features does not make a buyer want to purchase the home, but that an adept listing agent can speak intelligently about the market and the area, and can get more potential home buyers in the door.

Steve Harney Says You'd Better Sell Now

One of our favorite real estate analysts and guides, Steve Harney was just on the Fox Business segment, talking about the importance of working with an expert, and also about how the time to sell is now.

Unsurprisingly, he was talking common sense about Supply & Demand, and he shared something you may not already realize: the banks have a whole lot of inventory on their books (we're talking about foreclosed homes here) that is not yet on the market for sale. As they do put these properties on the market, our already deep housing inventory becomes even deeper. How many homes? 3.2 to 5 Million homes in "shadow inventory".

Greater supply, without a surge in demand, leads to a continued softening market.

Chicago has one of the three largest shadow inventories in the country, so we will be impacted.

Steve projects, consistent with Fannie Mae, Bank of America, and Wells Fargo, an 8% drop in home prices this year.

Watch the full interview: