Tax season: Everyone’s favorite time of year has just begun. For homeowners, there is an added layer of complexity when filling out your return. Owning your home is a huge investment, if you know what you’re doing, you can make some of your money back at tax time.
I bought a house: What tax rebates should I know about?
While there is a plethora of tax breaks for homeowners, it’s important to note that most of these are available only if you itemize your deductions instead of taking the standard deduction.
Itemizing means forgoing the standard deduction and instead listing specific deductible expenses. This makes financial sense if your total itemized deductions exceed the standard deduction.
This year, the standard deduction is $14,600 if you’re single or filing separately and $29,200 if you’re married and filing jointly.
Homeownership comes with many perks, but understanding how to maximize your tax benefits is one of the most valuable..
If you’re unsure whether to itemize or take the standard deduction, consulting with a tax professional can ensure you make the most informed decision for your situation.
1. Mortgage interest
The mortgage tax break is one of the most common. It enables you to deduct the home mortgage interest on the first $750,000 of your loan/debt if you’re single or married filing jointly, or $375,000 if married but filing separately, according to the IRS.
If your loan dates before Dec. 16, 2017, the cap is higher: $1 million, or $500,000 if married filing separately.
This is the first of many examples of how different filing statuses can affect your return, such as how much taxes you owe, the credits you can claim, and whether you can get a refund.
There are five filing statuses: single; married filing jointly; married filing separately (if you’re married and don’t want to file jointly or find that filing separately lowers your tax); head of household if you’re single and you paid more than half of your living expenses for yourself and a qualifying dependent; and qualifying surviving spouse.
2. Property tax deduction
Property tax is also deductible up to the $10,000 state and local tax cap.
“That threshold is a combination of state income taxes and property taxes, and most families who own homes will exceed that just with their state taxes unless they live in one of the few states without a state income tax.
3. Home office deduction
You might qualify for a home office break if you work from home.
In general, you have to be self-employed, an independent contractor, or a gig economy worker, and the space has to be used exclusively as your home office and your primary place of business.
If you qualify, it can provide a hefty deduction because, in some cases, you can deduct a portion of your mortgage, insurance, utilities, property tax, repairs, and maintenance, she explains.
There are two ways to claim the deduction. The simplified way allows you to deduct $5 per square foot of your home office with a 300-square-foot cap. The regular method is more complex and uses criteria such as “the percentage of home used for business” and “actual expenses,” according to the IRS.
You can deduct a portion of the expenses for your entire house, but be careful because those conditions are very strict and the IRS loves to disallow it in audits.
4. Residential energy-efficient tax credits
Cummings says homeowners who make qualifying energy-efficient improvements such as installing solar panels or energy-efficient HVAC systems, may be eligible for a credit of up to 30% of the cost of these upgrades.
The maximum credit you can claim each year is “$1,200 for energy-efficient property costs and certain energy-efficient home improvements, with limits on exterior doors ($250 per door and $500 total), exterior windows and skylights ($600) and home energy audits ($150), $2,000 per year for qualified heat pumps, water heaters, biomass stoves or biomass boilers,” according to the IRS.
5. HOA fees
HOA fees can add a substantial financial burden; in some very specific cases, you may be able to deduct them. These include if you use your home as a rental or for business purposes.
If you own a home that you use sometimes for vacations and sometimes rented out, you can deduct the portion tied to the time the property is rented out.
And if you have a home office, you can deduct a portion of the HOA fees that is the same percentage as the percentage of your home used as your home office.
If your home office is 15% of your home’s square footage, you can usually deduct 15% of the HOA fees.
6. Home expenses
If you use part of your home exclusively and regularly for business purposes, you can deduct some of your home expenses, such as mortgage interest, utilities, and maintenance.
Again, this deduction is available to self-employed individuals, not W-2 employees.
7. Points paid on a mortgage
Mortgage points—also called discount points or prepaid interest points—are a one-time fee you pay to lower the interest rate on your home purchase or refinance. One discount point costs 1% of your home loan amount.
The calculations can be tricky. Thankfully, there are a host of mortgage points tax deduction calculators you can use.
8. Medical home improvements
Home improvements can be deductible as a medical expense if their purpose is medical care for you, your spouse, or your dependents. For instance, these include the installation of exit ramps or bathroom railings.
How do tax deductions work for homeowners?
It all comes down to how you’re using the property.
If it’s your primary residence, you’ve got the “big deductions”: mortgage interest, property taxes, and potentially mortgage insurance.
But if it’s a rental property, there are more opportunities. You can write off repairs, property management fees, and even depreciation. And if you’re house hacking, like renting out a room or a unit, you can split deductions based on the percentage of the home you’re renting out, he says.
Each type of homeownership has its own rules, and understanding them can save you thousands.
As for special circumstances, seniors and multigenerational households have some “great opportunities” if they know where to look.
For seniors, reverse mortgages can be a game changer with no taxable income and no monthly payments. Some states offer property tax exemptions for seniors, so it’s always worth looking into.
And for multigenerational households, if you’re taking care of a parent, their medical expenses like home modifications for accessibility can often be deducted.
Can I avoid capital gains tax on property?
The short answer is yes. There are a couple of ways to do so when selling your property.
If you own the home and it is your primary residence, then the first $250,000 ($500,000 if married) of capital gains is tax-free.
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