There are many benefits to home ownership. Some of the most obvious include freedom to modify your home and property as you wish and holding a valuable asset that you can sell at will. When you own a home, you can also benefit from certain tax deductions that renters aren’t eligible to claim.
Can I deduct homeowners’ insurance on my taxes?
Unfortunately, you can’t deduct homeowners insurance on your taxes, but there are still many other deductions available to homeowners. Whether you do your taxes or rely on a professional to do them for you, here are some common tax deductions homeowners frequently claim.
Home office deduction
If you work from home, you may be able to deduct a portion of your mortgage, utilities and other home expenses. There are certain restrictions for claiming the home office deduction, but if you qualify it could be a sizable deduction come tax season.
Equity loan interest
In some cases, homeowners can deduct the amount of interest they pay on home equity loans. It’s important to note that there are limits to the amount of debt that homeowners can include under the “home equity” umbrella.
Currently, the new federal tax reform laws suspend the deduction for interest on home equity indebtedness for the next eight years. But the suspension does not apply to all home equity loans (HELs) and lines of credit (HELOCs). You can still deduct home equity loan interest that is used to pay for home improvements such as a kitchen renovation or a new roof.
Though, you may want to rely on an experienced tax consultant to help you apply for this deduction. According to the IRS, your primary home or a second home must secure the loan, and not exceed the cost of the house to be eligible.
The new tax law set a lower dollar limit on mortgages. Starting this year, homeowners may deduct interest on just $750,000 in home loans. The limit applies to the combined total of loans used to buy, build or improve the owner’s primary home and second home.
Your city or state property taxes are deductible from your income each year. It is important to note there is an exception to this deductible expense, though. If you set up an escrow or impound account because of a lender requirement, you can’t deduct any escrow money that’s being held for future property taxes until the funds have officially been used to pay those taxes.
As a homeowner, you may be wondering “Can you write off home repairs on your taxes?” The answer is, “possibly.” Any money you spend on your home can be separated into two main categories for tax purposes: repairs and improvements. Improvements can add to your tax basis on your home.
Your tax basis is the amount you would subtract from your home’s sale price to figure out your profit amount. A capital improvement prolongs the life of your home or adds value to it. Make sure you save all home improvement receipts so you can show them to the IRS in the event of an audit.
While capital improvements are tax deductible, repair costs can’t be added to your tax basis nor deducted from your taxes. Things, like repainting your home or replacing broken windows, are not valid tax deductions.
If you’ve purchased a new home, you probably paid closing costs and may be wondering “What part of closing costs are tax deductible?” If you itemize your tax deductions, you can deduct certain real estate (property taxes) and mortgage interest for the year your home was built or purchased. Those are the only parts of your closing costs that are allowable deductions.
Many new homeowners wonder “Is there a tax deduction for buying a house?” Fortunately, there is. The significant tax break you get from homeownership is deducting your mortgage interest.
Your lender will send you a specified form (Form 1098) before tax filing season is over. It will show the amount of mortgage interest you paid the previous year. You can deduct this amount (up to $1,000,000) on your taxes.
In some cases, mortgage “points” are deductible. You may have to pay your lender “points” when you buy your house. Typically this refers to the percentage of the loan amount you pay.
If you use your home to secure your loan and you pay the typical amount of points for your area, you can deduct the points from your taxes as interest. Only, you have to make sure your down payment at closing is equal to your mortgage points.
For example, if your mortgage is $300,000 and you pay two points (2%) on it, you can deduct your points as long as you put in $6,000 as part of the deal. Deducting points can be confusing, so you may want to recruit a skilled tax consultant to help you figure out how to properly deduct points from your taxes.
Mortgage Insurance Premiums
If you put less than 20 percent down on a home, you probably have to pay mortgage insurance premiums. This extra fee is designed to protect the lender if you miss payments on the loan as agreed.
Mortgage insurance premiums are tax deductible if it was issued in 2007 or later. In the future, this deduction may not be available if Congress fails to renew it.
These are some of the more common tax deductions homeowners claim. An experienced tax preparer can assess your situation to determine whether or not you’re applicable for any additional tax deductions, including energy tax credits and other deductions not mentioned here.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.