When it comes to preparing taxes, it doesn't bring up good feelings for many. Knowing you can deduct some of your expenses related to owning a home makes the process seem much more positive.
When you buy a home, you get to take advantage of a variety of tax deductions. This can result in incredible savings! Let's look at homeownership tax deductions so you can get more out of your tax returns.
When you buy a home you're going to pay a lot in mortgage interest. As a matter of fact, the majority of what you're paying for in the early stages of your mortgage is interest. You get to deduct a good portion of it on your taxes! Depending on the size of your home loan and how much interest you paid in the first year of owning your home, you could easily end up deducting upwards of $10,000!
Property taxes vary throughout the U.S. and can be deducted on your taxes. The states with the highest property taxes include New Jersey, New Hampshire, and Texas. In these states, you could end up deducting thousands of dollars. Regardless of how much you pay in property taxes, it's worth your time to take advantage of the deduction.
If you bought your house with mortgage points, you can take advantage of a tax break. Points are pre-paid interest, included in mortgage interest, and can be written off at tax time (some restrictions apply). Each point is equal to 1% of your loan amount or $1000 per ever $100,000 borrowed. If you bought a $300,000 home, a point would amount to $3,000 -- a sizable deduction.
Home Improvement Loans & Interest
Certain home improvement loans, like equity or HELOC, will also provide a tax break on the interest you pay. Similar to mortgage interest, the greatest tax benefit comes from the first few years of the loan when payment of mostly going towards interest. For those who file taxes jointly, they can deduct interest up to $750,000; whereas if you file separately, you can deduct up to $375,000.
These home improvement loans must be used to make capital improvements to your house, renovations that go beyond repair, if you want to be eligible to deduct the interest. In other words, the improvements must prolong the life of your home, adapt your house to a new use, or increase the structure's value. A new roof is a good example but patching an existing roof is not. Some other examples include siding or window replacement, kitchen or bathroom remodel, entry door replacement and finishing the basement. Keep in mind, some of these repairs only become tax deductible when you sell your home.
If you work from home and have a home office strictly dedicated to your work, you could get a tax break. You cannot use the office for anything else like a craft room because, if you were to get audited, you would be in trouble with the IRS. The deduction is typically $5 per square foot of office space.
Energy-Efficient & Renewable Energy Upgrades
If you have energy-efficient upgrades on your house, like solar panels, you can take advantage of energy efficiency tax credits. Whether you have a wind turbine, solar water heat, hydroelectric energy, fuel cells using renewable fuels, ceiling fans, among others, you can earn as much as a 100% deduction.
Certain renewable energy upgrades, like solar panels, provide a 30% tax credit. Other energy upgrades, like insulation and roofs, also provide credit. Although you can get tax credits for these upgrades, they won't necessarily increase the overall value of your home.
You might be wondering if there are any tax deductions you can take advantage of if you sold a home last year? Yes, if you made money off of the sale of your primary residence is below the national threshold (up to $250,000 selling as a single person; $500,000 as a married couple) than it's free from taxation. You might even be able to deduct your moving expenses if you meet certain criteria.
As a homeowner, you can take advantage of a variety of tax deduction which could save you thousands of dollars. Talk to a tax professional if you are unsure about any of the tax deductions mentioned in this article and give yourself plenty of time to work on your taxes before the deadline.