Being a homeowner definitely has its advantages, and saving money on your taxes each year just might be at the top of the list. Owning a home is a significant investment and it's important to understand how it can impact your taxes. Make sure you're taking advantage of these 9 common tax perks as a homeowner every year!
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1) Mortgage interest deduction
One of the most common tax perks, you can deduct mortgage interest for your primary residence. The maximum amount of debt you can deduct is $750,000 for married filing jointly and $375,000 for single/married filing separately. For a second home, you can deduct interest if it wasn't rented out for more than 14 days of the year. Once its rented the 15th night, its considered a rental property and would be reported but differently. You can also deduct interest for a HELOC or home equity loan but there may be different limits for different types of loans. Mortgage interest deduction REDUCES your taxable income but is not a tax credit; in the end you pay less tax because the deduction may change the bracket your taxed at. If you don't own a home, you have no interest you can deduct from buying any other service or things, so you are missing out. If you rent, your landlord is getting this tax deduction either from their interest or depreciation. On the other hand, don't fall into the trap of paying interest just because its beneficial by reducing your taxes. Paying off your home as quick as possible is the best financial move.
2) Property taxes or real estate taxes
State or city property taxes are fully deductible from your income. Your mortgage lender may have required you to set up an escrow account, and in this case, you can only deduct escrow money held for property taxes when the funds are used to pay the property taxes. Keep in mind that if you receive a refund on city or state property taxes, this will reduce your federal deduction. This is an itemized deduction, so you'll need to itemize all your deductions to take advantage of this tax break instead of the standard deduction. State and local income taxes have a limit on the amount you are able to deduct. In low tax states like Arkansas this isn't a problem, but other coastal states may have this issue. I believe the limit is $10,000 per year currently.
On your fee schedule from your lender, you'll probably notice some different charges. One charge is called, "points" and one point equals 1% of your loan principal. It's common for home loans to have 1-3 points and you can deduct all points associated with a home purchase mortgage. If you have refinanced loan points, you can also deduct these, but only over the life of the loan, and not all at one time. If you refinance, you can deduct the balance of the old points and begin to amortize the new right away. Points are also limited to the first $750,000 of debt for married couples. PMI (Primary Mortgage Insurance) is also deductible if you bought your home in certain years (2017-2021). It also has income restrictions: you have to have AGI less than $100,000 for married couples. This is charged by the lender when you put less than 20% down payment on a loan, which is commonly seen in rural development, FHA and VA loans.
4) Costs associated with moving for work
If you moved to a new home for a new job, you might be able to deduct some of your moving expenses. There are some stipulations to qualification, like your new job has to be at least 50 miles farther from your old house as your old job was. This is not just an across the town move! The expenses need to be made within 1 year of first reporting to your new job. You need to be full time and work about 40 weeks there. Some of these can be waived by disability, death, military commitments and more. Some of the moving expenses you might be able to deduct include costs for storage, transportation (mileage/gas/oil), and lodging. These are moving expenses though--it doesn't include house hunting expenses.
5) Tax Deductions for Home improvements
If you've completed some home improvements that are considered a "capital improvement" AND took out a loan to cover the upgrades, you can deduct the interest on it, with no upper limit. The home improvements can't be for ordinary repairs like drywall repair, painting, fixing gutters or patching a roof--they need to be renovations that contribute to increasing the property value of your home. Items such as a new roof, pool, a garage, addition, landscaping, or insulation would all likely qualify. Even if you didn't get a loan, you can also get credits for energy efficient home improvements. It can include adding insulation, a new furnace, upgrading your windows and more. The amount you'll receive depends on the improvement made and the cost of the upgrade. I wish I would have paid more attention to this when I replaced my furnace in 2021. I should've paid a little bit more to get the 16 SEER and received the tax deduction. Unfortunately, I didn't seek advice or research my decision and missed out!
6) Home office deduction
This is a deduction often missed! If you work from home and have a dedicated home office that you use exclusively for your work, you may be able to deduct a portion of your home costs. It does need to be your principal place of business, but it doesn't have to be the only place you see your clients and customers. You can deduct rent, utilities, taxes, repairs/maintenance and more. It doesn't need to be a house you own; it can be a place you rent or your she shed or mancave in your garage.
7) Selling costs
If you sell your home, you might be able to reduce your taxable capital gain by the amount of your associated selling costs. Some of the selling costs that you can deduct from your profit include legal fees, inspection costs, title insurance, broker's commissions, advertising, or possibly repairs you paid for. You can use your closing statement as a guideline, but there may be some expenses you had during the listing period. Make sure to keep a record of these costs to have when you are ready to file.
8) Capital gains exclusion
If you're married, file taxes jointly, and sell your home, you can keep up to $500,000 in profit on the sale of a home as long as it was your principal residence for at least 2 of the past 5 years. Married couples filing separately, as well as singles, can keep up to $250,000 each, tax-free. If you weren't in the home for 2 of the last 5 years, you may be able to meet the requirement if it was due to divorce or job change. If you owned the home for less than a year you will have short term capital gains. This is taxed based on your ordinary income tax rate, between 10-37%. If you owned the home longer than a year, your gains tax rate is 0, 15 or 20% depending on your filing status and income of the year you are filing.
9) Buying a home for the first time
If you're a first-time homeowner, you might be able to withdraw up to $10,000 from a traditional IRA without a penalty to help cover the costs of purchasing a home. This can be used to buy, build or rebuild your first home. The $10,000 penalty free withdrawal is per individual, so a couple could have $20,000 to start their home journey. To be able to withdraw these funds as a first time homebuyer, you cannot have owned a home in the last two years. The first time homebuyer can be you, your children, grandchildren or your parents, but is only a one in a lifetime withdrawal. Generally, it is not recommended to withdraw any funds from your IRA until you are required to. You will be set back the thousands of dollars or more in interest which didn't have a chance to grow.
Consult a tax professional to help maximize all the tax breaks for your unique situation. How does a house affect taxes-many ways beyond your purchase or loan to include improvements and selling. Need a recommendation for a tax professional or have questions? Reach out to me or learn more about other ways to save on taxes. Check out our other blog posts!