Owning a home can be expensive. Paying for property taxes, repairs and homeowners insurance can significantly reduce what you can spend on luxury items and discretionary goods and services. Fortunately, homeowners may be able to recoup some of the money they’ve lost by claiming tax deductions and credits. A financial advisor can help you optimize your tax strategy for your property goals and needs.
The Home Office Deduction
Small business owners who work from home may qualify for the home office deduction. If you’re eligible, you may be able to deduct a portion of your homeowners association fees, utility bills, homeowners insurance premiums and the money you used to repair your home office. The amount you can deduct depends on several factors, including the percentage of your home that’s used exclusively for business.
Claiming the home office deduction won’t automatically trigger an IRS audit, but you’ll need to be careful. You’ll need to keep up with receipts, canceled checks and other documentation and be ready to prove that your home office isn’t used for another purpose that isn’t related to your business.
Tax Breaks for Homeowners
Owning a home has its perks. Homeowners can get a tax deduction for various expenses (although many of these tax breaks tend to favor the rich). If you qualify for the mortgage interest deduction, you can deduct mortgage interest on up to $1 million of debt (up to $500,000 if you and your spouse are filing separate tax returns) that accrued while you were buying or improving a first or second home before 2018. Debt accrued after this date has limits of $750,000 and $375,000, respectively.
Another deduction can give homeowners a tax break for paying mortgage points. Homebuyers can pay points to reduce their mortgage rate. A single point is equal to 1% of a mortgage loan amount (which usually allows homebuyers to deduct 25% of their mortgage rate). If you purchased a house for $1 million or less, the full amount of mortgage points that you paid may be deductible.
In order to deduct your mortgage points as prepaid interest, you must meet certain requirements. For example, the money you used to pay mortgage points must come from your own bank account, not a loan. And the points must be discount points. For your first and second home, you cannot get a deduction for paying origination points, which are what you pay to have a loan processed (and they may include fees and closing costs).
The Property Tax Deduction
In addition to claiming the deductions for paying mortgage interest and points, just about any property owner with land, a primary home, a second home or foreign property may be able to get a deduction for paying real estate taxes. But you cannot deduct your property taxes if you have a rental or investment property.
If you split your property tax burden with the person who sold you a home, you can only write off the portion you actually paid. If you’ve been paying into an escrow account, you can only deduct the amount that your lender paid (this should be reflected on your property tax bill).
Claiming Tax Breaks for Household Expenses
To claim your home-related tax deductions, you’ll need to itemize your deductions. You can do that by completing the Schedule A tax form and figuring out how much you can deduct. Itemizing your deductions might not be worth it, however, if you can reduce more of your taxable income by taking the standard deduction.
If you want to claim a tax credit, you’ll likely need to fill out a form and submit it when you file taxes. For example, to claim the Residential Energy Efficient Credit, you’ll need to complete IRS Form 5695 and attach it to your tax return.
Know What You Can’t Deduct
As you prepare to file your income tax return, you’ll need to have a firm understanding of what you can and can’t deduct. For example, you can’t directly deduct expenses that you paid while working on a home improvement project. Of course, if fixing up your home boosts your property value, you may be able to deduct the additional property tax payments that you made during the year.
Note that if your second home doubles as a residence and rental property, it’s considered an income-producing property for tax purposes if it’s rented out for more than 14 days out of the year (or you use it for personal reasons for less than 10% of the total days you rent it out, whichever is greater). In addition to increasing the amount of money that’s subject to taxation, having rental income may reduce what you can deduct on your tax return.
Bottom Line
There are many opportunities to deduct certain expenses surrounding your home, depending on your unique situation. If you’re not a tax expert then it should be noted that it can be difficult to know when and what to deduct. You may want to work with an accountant or financial advisor who can help make sure you’re tax planning effectively.
Tips for Managing Your Finances During Tax Season
- A financial advisor can be a key resource in helping you figure out your taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you don’t know whether you’re better off with the standard deduction versus itemized, you might want to read up on it and do some math. You could save a significant amount of money by educating yourself before the tax return deadline.
- SmartAsset has you covered with a number of free online tax resources to help you during tax season. Check out our income tax calculator and get started today.
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