19
Feb
By Fred Gruber
Taxes

Common Places to Find Tax Deductions in Your Home

Paying your income taxes each year leaves your wallet a bit thin? There may be money hiding in your home that lessens your tax burden. Here are four places to look:

  1. Home-Office Deduction

If you work from home, you could qualify for a home-office deduction. Taking the deduction can be a bit complicated; so many people who qualify don’t claim the exemption. An estimated 26 million Americans have home offices, but only 3.4 million claim them on their tax return. Perhaps that’s why the Internal Revenue Service attempted to simplify the process in 2013. The write-off takes into account depreciation, utilities, insurance, the amount of square footage dedicated for office space, whether you host clients at your house and other factors. Because the parameters involved in filing a home-office exemption are rather complicated, it’s best to keep all business-related receipts, records of client meetings and other pertinent information to make things easier when you prepare your return.

  1. Casualty Loss

Damage to your home from an act of God or a theft or burglary may qualify you for an income tax exemption. To qualify for the write-off, the causality loss must meet the “sudden event test.” That means it must be sudden, unpredictable, have involved some natural force and occur in a single instance. To claim thefts and burglaries, you must be able to prove that a wrongdoing has actually occurred. It can’t just be a case of a lost item that you suspect was stolen. Proof can come in the form of witness statements, police reports or newspaper accounts.

  1. Energy Efficiency Upgrades And Repairs

Upgrading your home with energy efficient improvements can qualify you for a tax deduction. New roofs, insulation, windows, doors, and a number of additional items qualify for the deduction. The deductions let homeowners claim 10 percent of the total bill for energy efficient materials. The maximum credit is $500.

  1. Real Estate Taxes And Newly Purchased Homes

New homeowners should look at their settlement statement a bit closer. If the previous owner prepaid property taxes that cover any of the time you owned the home, you can include the prepaid taxes in your property tax deduction. Don’t pay more than you have to when you file your taxes each April. Consider these commonly overlooked deductions that can lessen the amount you have to pay.

27
Nov
By Fred Gruber
Taxes

Why Tax Prep is Crucial for Mortgage Applicants

When you are preparing to buy a home, tax season should be on your radar as it plays a significant role in your mortgage application process. Whether you’re a first-time homebuyer or a seasoned investor, how you file your taxes can have a direct impact on the mortgage you qualify for. Understanding this connection can help streamline the process and potentially save you money on your loan.

How Tax Returns Impact Your Mortgage Application

The income reported on your tax returns is one of the most important factors in determining how much you can borrow for a home. For traditional mortgage loans, lenders typically rely on your reported net income (after deductions) to assess your ability to repay the loan. This means the way you file your taxes, including any deductions and write-offs, can significantly affect your borrowing power.

For example, if you are self-employed or earn income outside of a traditional salaried position, your tax returns will play a crucial role in assessing your qualifications. Let’s say your gross income for the year was $100,000, but you worked with your accountant to write off a substantial portion of that income for business expenses or other deductions. If those write-offs reduce your taxable income to $50,000, that’s the figure lenders will use to evaluate your eligibility for a loan.

It’s important to note that if your reported income is lower than you expected, alternative mortgage options, such as bank statement loans, may be available. These types of loans focus on your actual cash flow rather than relying solely on your tax returns. While bank statement loans may come with slightly higher interest rates or require a larger down payment, they could be a good option if your tax deductions are significant but you still want to access your home’s equity.

What If I Haven’t Filed My Taxes?

If you haven’t filed taxes, whether due to operating a cash-only business or another reason, you may still be able to qualify for a mortgage. There are alternative loan options such as bank statement loans or no-income-verification mortgages that do not require traditional tax documents. It’s essential to consult with a mortgage professional who understands your unique situation to determine which option is best for you.

What Do Lenders Look For on Your Tax Returns?

Lenders and underwriters closely examine specific line items on your tax returns to determine your ability to repay the loan. If you are self-employed, for instance, there are several expenses you may be able to add back to your net income to increase your qualifying amount. Here are some common items lenders adjust when reviewing your tax returns:

  • Net Profit or Loss (Schedule C): This is the starting point for determining your income. If it’s positive, it adds to your borrowing potential, while a negative figure may require additional documentation or justification.
  • Depreciation and Amortization: If you’re self-employed, any depreciation or amortization expenses from your business can typically be added back to your net income.
  • Business Use of Home: If you work from home, a portion of your home-related expenses (mortgage interest, utilities, etc.) can sometimes be added back into your income.
  • Depletion and Casualty Loss: These non-cash expenses can also be added back to your income.
  • Meals and Entertainment: These may be subtracted from your income if they were claimed as business expenses.

These adjustments can increase your net income, which in turn can improve your chances of securing a better loan. Being mindful of these potential additions or subtractions can help you prepare your taxes in a way that maximizes your borrowing power.

Strategies for Homebuyers to Prepare Taxes for Mortgage Success

  1. Work with a Tax Professional: To ensure your taxes are filed correctly and optimally for a mortgage application, it’s crucial to work with an accountant or tax advisor who understands the mortgage process. They can help identify deductions that may not be beneficial for homebuyers and ensure that your financial picture is as strong as possible.
  2. Keep Detailed Records: If you’re self-employed or a small business owner, maintaining clear and accurate financial records throughout the year is essential. This will help make the tax preparation process smoother and prevent any discrepancies when it’s time to apply for a mortgage.
  3. Consider Your Tax Deductions: Before you file, consider how your tax deductions impact your overall income. If your deductions are significant, you may want to discuss with your tax professional whether it’s worth reducing them to increase your income for mortgage qualification purposes.
  4. Prepare for a Tax Return Review: Be ready for your lender to carefully scrutinize your tax returns and potentially adjust your reported income. The more organized and transparent you are with your tax documents, the easier the process will be.

Tax preparation is a key step in the home-buying process, especially for self-employed individuals and those with non-traditional income sources. How you file your taxes can influence your mortgage application outcome, so taking the time to optimize your tax return before applying for a mortgage can be a game changer. Give us a call to find out more on understanding how taxes affect your borrowing power.

28
Mar
By Fred Gruber
Taxes

How to Evaluate Property Taxes and What You Need to Know Before You Buy

Retirement is a significant milestone in one’s life, symbolizing the culmination of years of hard work and dedication. As individuals approach this stage, meticulous planning becomes imperative to ensure a comfortable and financially secure future. Among the plethora of retirement planning options, real estate emerges as a challenging player, offering unique advantages that can enhance the overall strategy. Let’s discuss the pivotal role that real estate plays in retirement planning and why it deserves a prominent place in your financial portfolio.

Building Equity for the Future:

One of the fundamental advantages of investing in real estate is the potential for equity growth over time. Unlike other assets that may fluctuate in value, real estate often appreciates in the long run. By acquiring property early in your career and allowing it to accumulate value, you’re essentially building a robust foundation of equity that can serve as a valuable financial resource during retirement.

Steady Income Stream through Rental Properties:

Real estate’s ability to generate a steady income stream is a crucial factor in retirement planning. Owning rental properties allows retirees to enjoy a regular source of passive income, supplementing other retirement income streams such as pensions or social security. Well-managed rental properties can provide a reliable and predictable cash flow, ensuring financial stability throughout retirement.

Diversification for Risk Mitigation:

Diversification is a key principle in any successful investment strategy, and real estate offers an excellent avenue for achieving it. By diversifying your retirement portfolio to include real estate assets, you can spread risk and reduce vulnerability to market fluctuations. Real estate’s performance often exhibits low correlation with traditional financial markets, providing a hedge against economic downturns and uncertainties.

Hedging Against Inflation:

Inflation erodes the purchasing power of money over time, posing a significant threat to retirees. Real estate, however, has historically proven to be an effective hedge against inflation. Property values and rental income tend to rise with inflation, ensuring that the real value of your real estate assets remains relatively stable over the long term.

Downsizing and Lifestyle Adjustments:

Real estate plays a dynamic role in retirement planning by offering options for downsizing or making lifestyle adjustments. Retirees can leverage the equity built in their properties by selling and downsizing to a smaller, more manageable home. This not only releases funds for retirement expenses but also reduces maintenance costs and property taxes.

As individuals navigate the intricate landscape of retirement planning, embracing the role of real estate can significantly enhance their financial well-being. From building equity and generating passive income to providing a buffer against inflation, real estate stands as a versatile and resilient asset class. Including real estate in your retirement portfolio offers not only financial benefits but also the peace of mind that comes with a diversified and well-rounded approach to securing your future.