Homeowner Tax Deduction List
By owning your home, you are eligible to receive many tax benefits throughout the time you spend in your home. Here are the top ten on the homeowner tax deduction list.
1. Mortgage Interest and Mortgage Insurance
After you purchase a home, you are allowed to deduct all of your interest payments on any mortgage up to $750 million (per changes to the tax code that took effect beginning Dec. 14, 2017).
There are restrictions on this popular homeowner tax deduction, however. First, you can only deduct the interest on a mortgage up to $750 million if you are married and filing jointly. If you are married and filing separately, both you and your spouse can only claim interest up to $375,000.
Next, the mortgage debt must be secured by a first or second home.
If your bank requires you to buy private mortgage insurance, those premiums are tax-deductible in some cases. However, the amount of the deduction is scaled back once your income reaches $100,000 a year.
It is common to see fees in the amount of one to three points on a home loan. (One point is equal to 1% of the principal of the mortgage loan.) These fees are included on the income tax deductions list and can be fully deducted if they are associated with the purchase of a home.
If you are refinancing your home mortgage, points are still fully deductible but must be done over the life of the loan and not upfront. If you refinance your home, you can write off the remainder of old mortgage points.
3. Equity Loan Interest
Some people may be able to deduct some of the interest paid on a home equity loan (line of credit) from their 1040s. However, the Internal Revenue Service limits the amount of debt that can be treated as home equity for this tax deduction. You are limited to deducting the smaller of:
- $100,000 if filing jointly, or $50,000 for each person of a married couple if filing separately, or
- Your home's total fair market value minus certain outstanding debts against the home
4. Interest on a Home Improvement Loan
The fourth item on the homeowner tax deductions list is the interest on a home improvement loan of up to $750,000 (per changes in the tax code that took effect in 2018).
Many people find it necessary to take out a loan to make repairs or improvements to their homes. It's important to distinguish these two types of work, however, because only the interest on loans taken out for home improvements can be deducted from your income taxes.
A qualifying loan is one that is taken out to add "capital improvements" to your home. The improvement must increase your home's value, adapt it to new uses, or extend its life. Examples of capital improvements include adding a third bedroom, adding a garage, installing insulation, or landscaping.
Loans that do not qualify for interest deduction are those that are taken out for repairs only. Examples of repairs include painting, plastering, fixing broken windows, or replacing cracked tiles.
If you have repairs to make that can wait, you should wait until you are about to sell your home. Then you may be able to deduct these costs under the selling costs deduction.
5. Property Taxes
Property taxes are deductible for homeowners that itemize on Schedule A. The standard deduction for single or joint but filing separately taxpayers is $12,400, and $24,800 for married filing jointly.
However, if your money is being held in escrow for the purpose of paying property taxes, you cannot claim this deduction until the money is actually taken out of escrow and paid. In addition, if you receive a partial refund of your property tax, this reduces the amount of the deduction you can claim.
6. Home Office Deduction
If you use a portion of your home exclusively for the purpose of an office for your small business, you may be able to claim a deduction on your taxes for costs related to insurance, repairs, and depreciation.
The IRS recognizes two times when you may claim a home office deduction:
- When part of your home is used exclusively and regularly as either your principal place of business or a place where you meet and deal with customers or patients. If there is a separate structure attached to your home, then the regular and exclusive use does not also have to be your principal place of business; or
- Part of your home is used on a regular basis for storing things that are used in your business, such as product samples or inventory. This includes home daycare facilities.
When you sell your home there may be tax liabilities. If the business is located within the "four walls" of the home then the Home Sale Tax Exclusion will apply. The Home Sale Tax Exclusion allows for profits from the sale of a home up to $250,000 for individuals and $500.000 for couples. As long as the profits do not exceed those amounts, the business will not be taxed.
However, capital gains tax will be realized if the business is located in a structure not attached to the home.
7. Selling Costs
After you have decided to sell your home, you may be able to reduce your income tax by the amount of your selling costs. These costs can include things like repairs, title insurance, advertising expenses, real estate broker's commissions, and inspection fees.
The IRS only allows you to deduct selling costs associated with repairs if the repairs are made within 90 days of the sale, and the repairs were made with the intention of improving the marketability of the home.
Selling costs are deducted from your gain on the sale, which is found by taking the selling price and subtracting the closing costs as well as your tax basis. (Tax basis can be found by taking the original purchase price and adding the cost of any capital improvements you made to the home along the way, and then subtracting any depreciation.)
8. Capital Gains Exclusion
When you sell your home, you may be able to keep some of the profit as tax-free income. If you are married and filing jointly, you can claim up to $500,000 in profit from the sale of your home, provided that you used the home as a principal residence for two of the previous five years.
If you are filing either as single or married but filing separately, you may keep up to $250,000 of the profit tax-free.
9. Moving Costs
If a new job requires you to move, you used to be able to deduct a portion of your moving costs from your income taxes. Now, this deduction is limited to military service members only.
In order to be eligible for this deduction, active-duty service members must be required to move because of a permanent change of station. Moving cost deductions include such things as transportation, lodging, and storage fees.
10. Mortgage Tax Credit
The mortgage credit certificate (MCC) program allows qualified low-income, first-time homebuyers to deduct up to 20% of their mortgage interest payments from their income taxes.
To get started in the MCC program, you must apply with your state or local government to be issued a certificate. This credit is available for each year you own your home and is subtracted directly from the amount of income tax you owe.
Need Help Understanding Homeowner Tax Deductions? Contact an Attorney
If you're a homeowner it pays to be aware of the laws and how to best take advantages of the tax benefits available to you. A real estate attorney with tax law experience can point you in the right direction.
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