Your home is likely the single most expensive
purchase you’ll make in your lifetime, and you’re regularly reminded of your
big buy with mortgage payments, monthly bills, property taxes, insurance and a
string of other expenses. But at tax season, homeowners score a massive break
with a series of tax benefits — in some cases, all of the perks from Uncle Sam
could alleviate the taxes you owe or even lead to a big boost to your bank
These tax breaks apply to all types of homes
and not just the conventional single-family house. If the roof over your head
is a mobile home, townhouse, condominium, cooperative apartment or another
dwelling you call home and have a mortgage contract on, these tax breaks are up
for grabs. Turns out, homeownership isn’t just about calling the shots on
decorating and evading rent increases — if you do your research and claim each
tax benefit you’re eligible for, being a homeowner could get more money back
into your pockets during tax season.
Here’s a thorough look at the various tax
credits and deductions you should make use of.
Housekeeping Notes to Start
As a homeowner, you’re doing some full-blown
adulting with your tax refund. Bid farewell to the days of simply plugging in
your W-2 information into a 1040EZ form — things are about to get much more
complicated as you start itemizing your deductions and credits, and keeping on
top of receipts and accounts to back up your tax claim.
When it comes to your taxes, there are
deductions and credits. Credits are like coupons — they subtract from the sum
of taxes you’ll have to pay. For example, if you owe $1,000 but you’re eligible
for a $500 tax credit, you’ve essentially cut your taxes owed in half. On the
other hand, tax deductions take away from your adjusted gross income,
potentially bumping you to a lower tax bracket and reducing your tax liability.
Not everyone has to itemize their deductions. A
standard deduction is how much you can reduce your taxable income, no questions
asked, without having to itemize your return. Under the 2017 Tax Cuts and Jobs
Act, the standard deduction was increased starting in 2018, meaning far fewer
Americans need to itemize their returns to receive the maximum amount of money
back on their taxes. The standard deductions were increased to $24,000 for
married taxpayers filing jointly and $12,000 for single filers.
The Tax Policy Center estimates that up to 27
million fewer people need to itemize their taxes because of this change, but
that means another 19 million taxpayers will still benefit from doing so.
With these tax breaks below, it may be worth
your while to itemize your taxes and capitalize on perks designed by the IRS to
encourage buying real estate and sweeten the deal for homeowners.
The biggest payout you’ll receive on your
taxes for being a homeowner is tied to your mortgage interest. All homeowners
with a mortgage of up to $750,000 can deduct the interest paid on their loan if
they’re married and file jointly. Single filers can write off up to $375,000. .
For tax years prior to 2018, homeowners can
deduct interest on up to $1 million (or $500,000 if filing separately). The Tax
Cuts and Jobs Act ushered in the reduced limits, which are slated to be in
effect until 2026. If you’re not sure if your loan sits in the grandfathered
category and it exceeds $750,000, double check with your lender or a tax advisor.
You also may be able to deduct the interest on
a home equity line of credit of up to $100,000 when it is used to purchase or
make improvements to your home.
Here’s how to claim your mortgage interest deduction:
Your lender will send you a Form 1098 at the beginning of the year clearly
listing the mortgage interest you paid during the previous year. This is the
amount you’ll deduct on Schedule A (Form 1040).
Make sure to include the interest you paid on
your home closing — the majority of the time, lenders include interest for the
partial first month of your mortgage rolled into your closing. If it isn’t
identified on your 1098, you can find it on your settlement sheet instead and
add it to your total mortgage interest paid. Every little bit counts!
This deduction is especially lucrative for
Americans with hefty mortgages. If you’ve just purchased a starter home for
about $150,000 to $250,000, you likely paid about $6,000 to $10,000 in mortgage
interest in your first year, which you can now deduct against your income. The
deductions only escalate from there with more expensive homes.
While property taxes — or real estate taxes — are
pesky, come tax season you can deduct this expense by up to $10,000. The
$10,000 cap was introduced with the Tax Cuts and Jobs Act. Before then,
homeowners were able to deduct the entire sum of their property taxes.
The latest rules combine your state and local
taxes, which encompass your real estate taxes too, in your $10,000 cap. You
can’t deduct foreign property taxes, which homeowners used to be able to do.
This tax reform change could hurt homeowners who spend loads on property taxes
but most should fall comfortably within the $10,000 cap.
The average American homeowner pays about $2,127
a year in property taxes, but this amount can easily double, triple or
quadruple depending on the state you live in. We’re looking at you New Jersey,
Connecticut and New York!
If you’ve paid your taxes directly to the
municipality you live in, keep records, receipts and copies of checks for the
payments you’ve made. If you paid your taxes through an escrow account or
they’re rolled into your monthly mortgage payments and paid via your lender,
you’ll see the total amount you’ve paid for this category on your Form 1098.
If you’re a new homeowner, chances are high
the seller prepaid property taxes which you later reimbursed to them. Include
this payment too; it’ll be on your settlement sheet.
When you took out your mortgage — either to
buy a new house or to refinance your existing home loan — there’s a strong
likelihood you paid “points” to your lender to help you secure your loan or
snag a reduced interest rate.
Mortgage points are another fee homeowners pay
for — conventionally, each point costs you about 1 percent of your home. For
example, if you bought a house and need a mortgage of $250,000, one point would
cost you $2,500. Your lender could charge you a single point, multiple points
or no points, but regardless, any points you have paid for are eligible to be
included as a deduction. The key here is that you have to have paid your lender
for these points in the past year.
When you make a mortgage payment, if points
are involved they’re built into the loan. Check with your lender, evaluate the
breakdown of your mortgage payment and scan your 1098 form to tease out what
this amount is. If your monthly payment includes $100 for points, your
deductible for the year would be $1,200.
Private Mortgage Insurance
We all can’t cough up a 20 percent down
payment when it’s time to buy a home. If you can’t pay one-fifth up front,
you’ll need to buy private mortgage insurance (PMI) as a reassurance to your
lender and to protect them in case you default on your loan. There’s a small
silver lining to this added expense to homeownership: You can claim a tax
deduction on your PMI payments if you took out your mortgage after 2007.
Current guidelines suggest that you can claim
this deduction if your adjusted gross income comes in at $100,000 or less if
you’re married or $50,000 if you’re single. Make sure to take advantage of this
perk as it’s a deduction that may not last — turns out, it was one of 30 tax
provisions that just eked through with an extension in 2018 and will likely be
under review again.
In a push toward green energy, the IRS is
rewarding homeowners who have made energy-efficient upgrades a priority in
their homes with a handful of tax credits.
Under the residential energy-efficient property
credit, any home improvements you undertake to boost energy efficiency come
with a tax credit of up to 30 percent of the installation cost. Examples
include solar energy panels and geothermal heat pumps. Upgrades made to your
home before a resale are eligible too.
It’s worth noting that the longer you wait,
the less money you’ll get to claim. Between January 1, 2017, and December 31,
2019, 30 percent of your expenditures tied to energy efficiency are eligible
for the tax credit. But between January 1, 2020, and December 31, 2020, the tax
credit decreases to 26 percent. By 2021, the credit is 22 percent before this
credit is reevaluated.
Take a thorough look at energy.gov because tax
credits, rebates and other incentives are plentiful but can be based on the
state you live in. Not all energy-efficient upgrades and products are eligible
for the tax credit. Before committing to anything, check for a manufacturer’s
tax credit certification statement, which is usually in the product packaging
or featured on the manufacturer’s website.
In some instances, you could get up to 10
percent of the cost of energy-efficient skylights, insulation systems, central
air conditioners, furnaces and water heaters. These upgrades aren’t as
ambitious as installing entire renewable energy systems, but they could make a
significant dent on your taxes.
Remember, tax credits are pretty valuable — they
essentially erase taxes you owe dollar-for-dollar.
New homeowners have it the easiest: It’s likely
new builds are already fitted with green technology so they’re eligible for
these tax credits without having to put in the legwork.
Home Office Expenses
Whether you’ve converted the spare room into
your office space or you’re teaching piano lessons from the basement, any space
used for working from home can be deducted as well. Right now, tax laws allow
you to take a tax deduction of $5 per square foot for up to 300 square feet of
office space for a total maximum deduction of $1,500. The guidelines are pretty
stringent so they’re worth checking out carefully before adding this deduction.
Deductions are limited solely to self-employed workers — your home office can’t
be a spare bedroom or set aside for a dual purpose, and it must be used
regularly as your principal workspace.
If you fit the criteria, you can write off a
portion of certain living expenses that are tied to doing your job, such as your
electric bill, Internet bill and homeowners insurance. You can even write off
expenses like computer equipment and stationery.
Capital Gains from Selling Your Home
We’ve now documented the various ways in which
homeownership can lead to several bonuses at tax time, but what most people
don’t realize is that selling your property garners a decent tax break too.
Because of the capital gains exclusion rule (or the home sale exclusion rule),
Americans selling their home get to keep all of the profits without paying any
The only catch is that the property must serve
as your primary residence for at least two of the five years prior to selling
it. You can profit up to $500,000 if you’re married and $250,000 if you’re
single tax-free. This is a major win, especially for those who make a pretty
penny on their home sale. Across the board, most homeowners don’t have to pay
any taxes on the profits they made from their sale.
If you didn’t live in the home for two of the
five years prior to its sale, you’re still eligible for the home sale exclusion,
but your deduction will be prorated instead. Partial exclusions can even be
made if you had to sell your home early because of unforeseen circumstances
from a change of employment or divorce.
Ultimately, this perk, along with the other
deductions we’ve covered, could save you thousands of dollars at tax time and
go toward the purchase of a brand-new home. And, of course, if you have any questions
about whether you qualify for these tax perks, it’s always best to talk with a
tax professional about your particular situation.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.