9 Tax Deductions For Homeowners
Here are the nine main tax deductions you should know about as a homeowner.
1. Mortgage Points Deduction
Your mortgage may be the largest debt you’ll ever tackle. Consider purchasing mortgage points. These can be a great way to not only save money over the duration of your mortgage but also to write off some of the interest paid on your loan.
What Are Mortgage Points?
Mortgage points are often referred to as discount points and are bought upfront, at the time you close on your mortgage.
One point is equal to 1% of your total mortgage amount. For example, let’s say your home is $200,000 and you want to put down an additional $2,000 at closing. In this case, you’d purchase one mortgage point. The purpose of mortgage points is to reduce your interest rate over the lifetime of your loan. Your interest rate decreases for each mortgage point you purchase.
How Do Tax Deductions Work For Mortgage Points?
You can typically claim the full amount on your taxes the same year you buy mortgage points. There are some stipulations you must meet to qualify, but most U.S. homeowners meet these standards. If your home loan amount is over $750,000, you’ll be limited to a specific amount you can claim on your taxes.
Use Form 1098 (provided by your mortgage lender) to claim the deduction and find the total number of mortgage points purchased. You’ll put this amount on line 10 of Form 1040 Schedule A. Your accountant or tax software can walk you through this step.
2. Mortgage Interest Deduction
You can also put a little money back into your own pocket with a type of tax break called a mortgage interest deduction. This deduction allows you to claim the total amount paid toward your mortgage interest within one year.
Homeowners can deduct the interest paid on the first $750,000 of qualified personal residence debt on a primary or second home.
You can find the amount of mortgage interest paid per year on Form 1098 from your mortgage lender. You’ll report this amount on Schedule A of the 1040 form.
3. Property Tax Deduction
Homeownership also requires you to pay property taxes. What you’ll pay in property taxes ranges depending on the state and county you live in as well as the overall value of your home. This covers things like road and highway construction, education and more. You can deduct the property tax payments you make each year if you itemize your tax return.
Let’s say you’re married and filing jointly. You can deduct up to $10,000 in property taxes per year when filing your taxes. On the other hand, if you’re single or filing separately, you can deduct up to $5,000 in property taxes. You’ll claim this deduction using Schedule A of the 1040 tax form.
4. Rental Deductions
Did you know you’re eligible for a rental deduction if you rent out a part of your home, such as a garage apartment, basem*nt or spare bedroom? You’ll need to pay taxes on any rental income, but you can recoup some money by deducting maintenance and repair costs, insurance, utilities and other rental expenses.
Simply fill out Schedule E of the 1040 form and subtract any expenses from your rental property income. Be sure to check with a tax professional to ensure you maximize this deduction.
5. Home Office Deductions
In some cases, you may be able to deduct business expenses from your taxes, particularly if you’re a self-employed homeowner. You must be self-employed – not just a remote employee – and meet all of the IRS’s stringent requirements to take advantage of this deduction, such as the requirement of the space being used exclusively for work.
The IRS allows homeowners with a qualifying home office to calculate the amount they’re able to deduct from their taxes in one of two ways. The first method involves calculating the actual expenses you spend operating your business from home. This could include maintenance, utilities, internet and other expenses. You’ll need to keep your receipts to back up your claims.
The second method is a simplified estimate that allows you to deduct $5 per square footage of office space. So, if your work area is a 10x20 space, or 200 square feet, you’d qualify for a $1,000 deduction.
6. Home Improvement Deductions
Home improvement products can add tremendous value to your home both by improving your space and increasing your home’s worth. Another upside to home improvement projects is that many of them qualify for tax deductions.
Home improvements that improve your home’s value are called capital improvements. Types of qualified improvements include swimming pools, home additions, garages, a new roof, a new central air conditioning system, water heater upgrades, home security systems and more.
As a homeowner, you can’t deduct these expenses. But the value of any capital improvements you make to the home is added to your cost basis in the home which in turn affects whether, and how much, you’ll pay in capital gains taxes when you sell the property. It’s important to keep records of all major home improvements for this reason. A qualified accountant or tax specialist can help you work through all improvements to determine which ones are eligible for this tax treatment.
