Owning a home is expensive, there’s no doubt about it. There are ways to make it more affordable, though. One such way is with tax deductible expenses. Chances are, you may not be taking full advantage of the benefits available to you. Here we will discuss the most common as well as the lesser known tax deductions.
Mortgage Interest – A Big Deduction
Your mortgage itself provides you with several tax deductions. The interest you pay every month is a great place to start. If you look at your current mortgage statement, you’ll see a breakdown of principal and interest. At the start of your loan, that interest is probably a good majority of your payment. As disheartening as it is, you can write that interest off. This pertains to your first mortgage. If you have a second mortgage, such as Home Equity Line of Credit, there are some limitations. They are as follows:
- Any money used from a HELOC that directly impacts your home is 100% tax deductible. You can use the money for down payment funds or home improvements. If you do, you can claim all of the interest on your taxes.
- If you use money from a HELOC for uses that don’t affect your home, you can’t write 100% of the interest off. Instead, you can write off interest on the first $100,000. Anything beyond that can’t be written off.
Real Estate Taxes – An Expensive Debt
Another great tax deduction is your real estate taxes. If you reimbursed the seller for any real estate taxes they already paid, you can deduct those as well. You can write off all property taxes on an owner-occupied property. You cannot, however, write off taxes paid on an investment or second home. The exception to this rule is if you rent the home out fewer than 14 days per year. You may then be able to deduct the taxes.
Points Paid for Your Mortgage
Many homeowners pay points to secure the mortgage they want. Whether it was points to bring the interest rate down or to make up for a risky loan, they are deductible. As long as you paid less than $1 million for your home, you can deduct the full amount of the deposits paid. Some points paid for a refinance are also tax deductible. It depends on your personal situation, though. Talk to your tax professional about your individual case to see if this pertains to you.
While you can’t deduct the money you pay for homeowner’s insurance, there is a loophole. If you experience a sudden loss pertaining to your home and insurance doesn’t cover it, you may be able to deduct the costs. This only pertains to sudden losses, such as those due to a fire or natural disaster. The cost of the damages not covered by insurance must exceed 10% of your adjusted gross income before you can deduct them, though.
Cost of Moving
Moving is expensive too! If you move because your job demands it, you may be able to deduct the expenses incurred for moving. This pertains to those employed by a company as well as self-employed borrowers. You must be required to move at least 50 miles from your current home in order to qualify, though.
Home Energy Improvements
A large home energy improvement deduction expired at the end of 2016. However, there are still a few that exist. Solar water heaters and solar panels may still provide you with a tax deduction. Less common things like wind turbines and geothermal heat pumps may also qualify you for a reduction in your taxes. Talk to your tax professional before investing in any changes to see how you might benefit.
Home Office Deductions
If you work for yourself or you work from home, your home office may provide you with a few tax deductions. You must prove the area you use for your home office is strictly for that use. If so, you may be able to deduct some of your utilities, homeowner’s association fees, and homeowner’s insurance premiums. Talk to your tax professional before taking this deduction, though. It can be a trigger for an audit if you don’t use it appropriately.
Expenses That Aren’t Tax Deductible
As usual, with the good comes the bad. There are certain homeowner expenses you can’t deduct, no matter how much they cost you each year. These include:
- Homeowner insurance premiums (unless you use the home office deduction)
- Homeowner’s association fees (unless you use the home office deduction)
- Private Mortgage Insurance (this deduction just expired in 2016)
- Many home improvements (unless you use a home equity line of credit to pay for them)
The good news is, there are plenty of expenses you can deduct pertaining to your home. Make sure you go over them with your tax professional. Things like a home office deduction can get tricky, especially if you don’t use the area exclusively for your work. Other things like property tax deductions and interest are pretty self-explanatory. The help of a professional is always warranted, though.
If you itemize your deductions on your tax returns, the tax deductible expenses of owning a home can help decrease your tax liability. Make sure you look at both options to see which suits you the best. Some homeowners may still benefit from the standard tax deduction. This decreases the risk of audits or taking deductions you aren’t eligible to receive. But, if itemizing benefits you more, take advantage of the savings being a homeowner provides!