We all know about the deduction you get on mortgage interest rates and on the property taxes on our South Bay homes, but did you know there are other benefits and tax breaks you can use with the ownership of real estate property. You could qualify for a $6,500 credit toward the purchase of a second home, as long as you move into it. Uncle Sam will fork over up to $1,500 to defray the cost of a pellet stove or water heater, and there are more. Tax code changes that occur every year allow property owners certain allowances and most of us cannot keep up with the people who are in charge of determining the tax laws.

What is the difference between a tax deduction and a tax credit? A deduction reduces your taxable income. A credit reduces your taxes, dollar for dollar. A $100 deduction may decrease your taxes by $15, while a credit will reduce them by $100.

What’s the deal with credits for first-time home buyers? If you buy a second home but keep the first one, you may qualify, provided you move into the new one. Income limits apply, but generally if you have owned and lived in a home for at least five consecutive years over the past eight and bought a new one between November 7, 2009, and April 30, 2010—or have one under contract and will close before July 1, 2010—you can get back 10 percent of its purchase price, up to $6,500. If you’re a first-time buyer or haven’t owned a home in the past three years, you can get back 10 percent of the purchase price of a new home, up to $8,000. You can take advantage of this credit on your 2009 or 2010 return. Keep in mind: You have to include a copy of your closing statement, so you won’t be able to file electronically. And if you move within three years, you may have to give the money back.
If I sell my house for more than I paid do I have to pay taxes on the capital gain? You can exclude a gain of up to $250,000, assuming the home was your primary residence during two of the five years preceding the sale. And that amount grows to $500,000 if you are filing jointly as a married couple. The law was tweaked recently to require the seller to pay some tax on the capital gain if the house was used to generate rental income after 2008. Check with your accountant for the latest in any tax code changes.
What are tax credits for home improvements? Most apply to energy savings, and they will exist on top of those cash for clunkers, appliance rebates, and state incentives for energy savings.
Many people are now working from their homes, is that deductable? The area being used for the work must be a distinct portion used exclusively just for the work being done for business purposes. Example: You cannot deduct the size of the kitchen as an office when you are only using the kitchen table. Or if your office doubles as a guest room at night.
Can you get a tax break for updating an old house? You might be able to get a credit for 20% of the renovation costs if the house is certified as being historic.
What are the tax breaks for investing in energy savings for my primary residence: Appliance will not qualify, however there are many breaks if you invest in energy savings at your principal address between Jan. 1, 2009, and Dec. 31, 2010. You can use these breaks even if you benefited from similar ones in earlier years. High-efficiency central heating and cooling systems, water heaters, biomass stoves, windows and doors, insulation, and heat-deflecting roofs are among the upgrades that qualify. The credit can be 30 percent of the purchase price of one or more products, maxing out at a total of $1,500 combined for both years. In the case of central heating and cooling, you can apply the credit to labor costs, too. Keep in mind that products must have high Energy Star ratings and are expected to be in use longer than five years. Remember that you must keep a certification statement from the manufacturer or installer and fill out form 5695. If audited you will have to show receipts and proof of installation, so you cannot buy a energy efficient water heater, for example, and store it in the garage. If you switch to alternative energy, there are tax credits available; up to 30% of the cost, with no cap, for the big ticket items like solar electric, solar hot water, wind power, and geothermal heating and cooling. If you did not take full advantage of the credit on the 2009 return, you can carry over some of it to the 2010 return. Credits for alternative energy are authorized through 2016, so if you haven’t made the switch yet, there’s still time, and as a reminder, you cannot use the solar hot water subsidy for your pool or hot tub, only daily hot water needs.

Consult with your tax accountant or financial adviser for current and up to date tax code changes. Start putting together all receipts and records now, don’t wait until April.