Homeowners carry expense burdens that renters are able to avoid. Home repairs, homeowner’s insurance, and property taxes are the heavy hitters, often consuming so much of their income that homeowners find themselves less able to purchase the goods and services they desire, not to mention luxury items and vacations.
Tax filing, while never enjoyable or exciting, is a key opportunity for homeowners to recoup a portion of the money they’ve had to put into their home by taking full advantage of the deductions and credits that exist to assist them. In this article, we’ll take a closer look at just a few of the tax breaks that any homeowner should consider.
One note before we get started: these homeowner deductions are all itemized. That means you won’t be able to claim them unless you waive the standard deduction. However, the standard deduction was recently doubled when the Tax Cuts and Jobs Act was passed, so it’s very important that you calculate how much money you would save by filing these deductions. You should only file an itemized claim if that amount is greater than the standard deduction you would otherwise be eligible for.
Mortgage Interest Deduction
Almost all homeowners are aware that they are eligible to deduct the interest they have paid on their mortgages when they file their federal return, but did you know that the deduction has recently been capped at $750,000? The good news is that all mortgages established before 2017 will be grandfathered in, but if you are considering a second home, bear this new limit in mind as you weigh your options.
Additionally, because mortgage points are essentially prepaid interest, they are also eligible for deduction. Homeowners can pay points to earn a reduction on their mortgage rate. One point equals 1% of a mortgage loan, so if your mortgage is less than $1,000,000, all points you paid throughout the year should be deductible. Additionally, you may be able to deduct points you paid if you refinanced your first home or took on a second mortgage.
In order to qualify to deduct mortgage points as interest, you will need to meet specific requirements. The funds you used to pay your mortgage points must have come from your own bank account and not have been funded by a loan, and the points must have been discount points. You will not be eligible for a deduction if you have merely paid origination points, which are required when processing a loan.
Property Tax Deduction
Your property taxes are a local tax that you can deduct under the “state and local taxes” deduction. This particular deduction can pack a financial wallop, especially if your state has very high property taxes. Please make note of the new deduction caps: as of 2018, the total state and local tax deduction are capped at $10,000. If you do live in an area that imposes high income and/or property taxes, you may not be able to fully take advantage of this deduction in years to come. It’s worth planning ahead for your coming deductions to make sure that you are recouping as much income as possible when you file your taxes.
Medical Home Improvements Deduction
If you have had to make changes to your home for medical reasons, you are eligible to deduct those expenses under the medical expense deduction. Whether you’ve installed an elevator, changed faucet knobs, or added handrails in the bathroom, all changes are covered equally under this category.
However, you will only be able to claim a deduction for medical home improvements if they don’t increase your home’s overall value. For example, your home may have been worth $250,000. If you added an elevator, costing you $85,000 but increasing the overall value of your home to $315,000, then you would only be able to deduct the cost ($85k) less the increase in your home’s value ($65k). The total amount of your deduction would, therefore, be $20,000, not the $85,000 you spent on the upgrade.
If, on the other hand, your medical home improvement doesn’t change your home’s value, you may deduct the full amount. The annual upkeep expenses for your medical home improvements will also be deductible in years to come, so keep careful records of any inspections and repairs.
Green Home Energy Deductions
Although the bulk of green home energy deductions expired after 2016, homeowners may be eligible for tax credits for installing solar water heaters and/or solar panels through December 2021. If you’ve invested in geothermal heat pumps, fuel cells, or residential wind turbines, you may be eligible for the Residential Renewable Energy Tax Credit. This tax credit allows homeowners to deduct 30% of the cost of installing any of these renewable energy systems in a first or second home.
Home Office Deductions
If you’re a small business owner who works from a home office, you may be eligible for the home office deduction. If so, you may be able to deduct a certain percentage of your HOA fees, homeowner’s insurance premiums, utility costs, and any repairs your home office required over the year.
This particular deduction is a bit tricky and hinges on several factors. While claiming this deduction won’t automatically bring the IRS down on your head with a full audit, it’s very important that you keep all receipts and any documentation that supports the claims you make on your returns.
Understand What You Cannot Deduct
While it’s key that you know what you’re entitled to deduct, it’s just as important that you have a clear understanding of what you cannot deduct. For instance, you may not claim expenses you incurred while making home improvements. If these improvements happened to increase your home’s value, however, you might qualify to deduct the increased property tax fees you paid during the year.
If you own a second home that serves as both a residence and a rental property, you can claim it as an income-generating property for tax purposes 1) if you rent it out more than 14 days per year or 2) if you utilize the home for personal reasons less than ten percent of the days that it’s rented out. Notice that a rental property both increases the amount of income that’s taxable and can actually reduce what you can deduct when it comes time to file your taxes.
Your homeowner’s insurance, flood insurance, fire insurance, and mortgage insurance are not tax-deductible. Lastly, if you invested in paying larger amounts to reduce your mortgage principal, these sums are not tax-deductible.