1. Mortgage Interest
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. Lastly, if you paid in full for the house, you cannot later take out an equity loan with the house as collateral and deduct the interest on the home equity loan.
If your bank requires you to buy private mortgage insurance, those premiums are tax deductible for mortgages in some cases. However, the amount of the deduction is scaled back depending on your income. If you are earning more than $100,000 a year, then the deductions start to lessen the higher your income rises.
One thing that many people fail to fully understand is the point system that mortgage lenders often use. Put simply, one point is equal to 1% of the principal of the loan. It is common to see fees in the amount of one to three points on a home loan. These fees are included on the income tax deductions list and can be fully deducted provided they are associated with the purchase of a home. If you are refinancing your home mortgage, then these points are still fully deductible, but must be done so over the life of the loan and not up front. Those that do refinance their homes can write off the remainder of their old 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:
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 affect in 2018). Many people find it necessary to take out a loan to make improvements to their homes, as well as for repairs and fixes. It is important to distinguish these two types of work, however, because only the interest on loans taken out for home improvements may be deducted from your income taxes.
A qualifying loan is one that is taken out to add "capital improvements" to your home, meaning the improvement must increase your home's value, adapt it to new uses, or extend its life. Examples of capital improvements are: adding a third bedroom, adding a garage, installing insulation, landscaping and more.
Loans that do not qualify for a home improvement loan interest deduction are those that are taken out for repairs only. Examples of repairs including painting, plastering, fixing broken windows, replacing cracked tiles and more. If you have repairs to make that can wait, you should wait until you are about to sell your home because then you may be able to deduct these costs under the selling costs deduction.
5. Property Taxes
Property taxes are deductible from your income taxes on your Form 1040 up to the amount of $10,000 for both individual and married couples (per a change in the law taking affect in tax year 2018). 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:
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. However, the IRS only allows you to deduct repair costs associated with selling costs if the repairs are made within 90 days before the sale, and the repairs were made with the intention of improving the marketability of your 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. Your tax basis is a technical term which can be found by taking the original purchase price and adding the costs of any capital improvements you made to the home and finally 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 may 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 so you can begin work, you used to be able to deduct a portion of your moving costs from your income taxes. But this is only limited to military service members, per changes in the tax code that took effect in 2018. Interested active duty service members must be required to move because of a permanent change of station in order to be eligible for these deductions. . Moving costs deductions may include items such as transportation, lodging and storage fees.
10. Mortgage Tax Credit
A program that some states use is a mortgage credit certificate (MCC). This homeowner tax deduction that helps low-income, first time homebuyers offset a certain portion of the mortgage interest on a new mortgage to help them qualify for getting a home mortgage. Traditionally, the MCC program allows qualified buyers to deduct up to 20% of their mortgage interest payments made on a home 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 the home and is subtracted directly from the amount of income tax you owe.
Need Help With Homeowner Tax Deductions? Contact an Attorney
If you're a homeowner and want to maximize your deductions, you should always be aware of the laws and how to best take advantages of the tax benefits available to you. While the above information may sound a little confusing, it doesn't need to be. A real estate attorney with tax law experience can help point you in the right direction.