As a homeowner, you can benefit from tax breaks that can shave thousands of dollars off your IRS bill each year, which could mean a higher refund check. Since it’s that time of year when we gather our documents and work on getting our taxes in as soon as possible, I wanted to remind you what owning a home can do to help your tax situation.
If you currently rent, becoming a homeowner will give you some tax benefits that could make you want to file your tax return.
Read over the list below to see what applies to your situation. You might be able to take other deductions that I haven’t listed here, so be sure to always consult with your tax advisor. This isn’t tax advice; it’s just a reminder of what to talk to your accountant about!
- Mortgage interest. If your home was purchased before Dec. 16, 2017, you can deduct the mortgage interest paid on your first $1 million in mortgage debt. You can deduct the interest on the first $750,000 for mortgages taken out since that date. You’ll want to talk with your accountant about whether deducting the mortgage interest or taking the standard deduction instead is better. If you decide to deduct the mortgage interest, you’ll need to itemize your income taxes to claim this. Don’t just fill out the 1040-EZ without doing the math first to see whether itemizing or the standard deduction will result in the lowest tax bill – or highest refund – for you.
• Property taxes. Property taxes on all real estate are fully deductible. When you buy a home, check the settlement sheet to see if you reimbursed the seller for property taxes he or she prepaid for a period you owned the home. If so, include that amount in your property tax deduction.
- Credit for green improvements. If you make qualified energy-efficient improvements to your home after January 1, 2023, you may qualify for a tax credit up to $3,200. The credit equals 30% of qualified expenses, including energy-efficient exterior doors and windows, insulation and air sealing materials, and even air conditioners and heat pumps. To learn more go here or check with your tax preparer.
- Investment Property/Rental Property. The cost of maintaining and marketing a rental property can be deducted from its income without regard to the owner’s tax status. These expenses include mortgage interest payments, insurance, utilities, maintenance, repairs, advertising and management fees, and the non-cash cost of depreciation.
• Home office. You can deduct the costs of a home office that you use exclusively as your principal place of business. This one is notorious for causing audits, so if you are going to claim this one, but be sure to talk with your accountant about your situation and whether you qualify.
- Tax-free rental income. The rental income is tax-free if you rent out your own home for 14 or fewer days during the year.
- Capital Gains: Remember, if you sold your principal residence, you may not have to pay tax on the gain. The IRS typically allows you to exclude up to $250,000 of capital gains on real estate if you’re single and $500,000 on real estate if you’re married and filing jointly. If you are selling an investment property, it gets a little more complicated, but you could also do a 1031 exchange to avoid paying capital gains on that sale. If learning more about that interests you, reach out to me, and we can talk more. I can also recommend a 1031 expert who can answer all your questions about this program.
So, there you have it—some basic information to help you maximize your tax advantages as a homeowner. But I’m no tax expert, so be sure to talk to your accountant, CPA, or whoever is preparing your taxes—they will know best based on your personal situation.
If you don’t have an accountant and want to use one this year, I can recommend several. Just let me know, and I’ll connect you.
