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Property Tax Funding Blog

11 Types of Tax Deductions Homeowners Qualify For

Posted by Matt Longhofer on Mon, Aug 09, 2021 @ 12:08 PM

11 Types of Tax Deductions Homeowners Qualify For

Becoming a homeowner is a major step in life. You’ll be responsible for maintaining your home, making repairs when necessary, and contributing toward your mortgage. At the same time, you’ll have the freedom to paint the walls, plant a garden, and raise a family.

As a homeowner, you’ll also need to pay taxes. Fortunately, you qualify for various tax deductions that can help you keep more cash in your pocket. The various tax deduction types below will provide a break on the total you owe, whether through your mortgage, common household purchases, capital gains, or other avenues.

1. Capital Gains

Whenever you receive money as a result of selling a property, that new income is subject to taxation. This tax is called a capital gains tax. The total amount of capital gains tax you owe is determined by the short- or long-term nature of your capital gains.

As a homeowner, you can claim a portion of the profits earned after you sell your home. Even though this new income is taxed, it’s taxed at a lower rate than your income is. Net capital gains can sometimes even be taxed at 0% if your income is less than $80,000 per year, according to the IRS.

After you sell your residence, you can exclude up to $250,000 of the profits, or up to $500,000 if you file jointly with your spouse.

To qualify for this capital gains exclusion, you’ll need to meet a few requirements. You’ll need to have owned the property — and used it as your primary living space — for at least two years. In addition, you generally are not allowed to claim the exclusion if you’ve also claimed it on another residence within the past two years.

2. Discount Points

Discount points represent prepaid interest toward your lender, which can help reduce the interest rate on your mortgage. Each point that you purchase typically lowers your interest rate by 0.25%. This rate deduction lasts for the duration of your loan and saves you money over time.

In even better news, discount points are often deductible as a legitimate tax break. Points can be deducted as home mortgage interest, as long as you itemize your deductions under Schedule A (Form 1040).

If you purchase discounts points paid to lower your interest rate, or paid on a loan to perform home improvements, you qualify for this tax deduction.

Many homeowners commonly deduct points evenly across the lifetime of their loan. You can also deduct all of your discount points during the year that they are purchased, as long as you meet all home mortgage requirements identified by the IRS.

3. Forgiveness of Debt on a Foreclosure

The Mortgage Forgiveness Debt Relief Act of 2007 paved the way for property-based debt forgiveness. Any mortgage debt associated with a foreclosure is eligible for this deduction, saving you from additional taxes on the money you owe.

This type of tax deduction only applies to individuals who have debt as a result of a foreclosure. If you’ve experienced a foreclosure between 2007 and 2017, you are eligible for this debt-cancellation tax deduction as long as your foreclosure was related to financial hardship.

Once you navigate your home foreclosure and settle your taxes, the next step is to avoid foreclosure in the future. Make smart financial decisions through budgeting and selective spending to avoid losing your home again down the road. If the need arises, you can also talk to a housing counselor, who can help you determine paths forward if your loan becomes unmanageable.

4. Home Equity Loan Interest

Despite recent updates that restrict tax deductions on home mortgages, the IRS still allows deductions on home interest paid against home equity loans. As long as you continue to make legitimate payments toward a home equity loan, you qualify for this deduction.

The Tax Cuts and Jobs Act of 2017 does limit deductions that can be made on home equity loans. However, you can continue to deduct interest on home equity loans as long as you use the money to purchase, renovate, or modify your primary or secondary residence.

5. Home Office Expenses

If you’re one of many homeowners working from home, you’re in luck: in certain cases, the IRS allows you to deduct home office expenses from your taxes

If you use at least part of your home to run a business, you might qualify to deduct certain home office expenses. To legitimately deduct these home office expenses from your taxes, you must use your home as your primary place of business. If you work on a limited basis out of your home, but you spend more time in a professional office, you likely will not qualify for this deduction.

As long as your home office is where you most regularly perform business, and you operate from a part of the house strictly used for business, you can deduct home office expenses. Claiming home office expenses on your deduction is easy as filling out Schedule C (Form 1040) and submitting it alongside other tax documents.

6. Mortgage Insurance

Mortgage insurance premiums represent one of the easiest deductions you can obtain as a homeowner. The IRS advises that you treat home mortgage insurance the same way you treat interest on your mortgage.

As long as your mortgage insurance agreement was established after 2006, you qualify for a tax deduction on mortgage insurance.

The IRS also makes qualifications for individuals who obtained mortgage insurance through private mortgage insurance companies, or through the Department of Veterans Affairs, Federal Housing Administration, or the Rural Housing Service. All fees associated with these mortgage insurance providers can be fully deducted if the insurance contract was issued in 2020.

7. Mortgage Interest

Unless you paid for your entire property upfront, you are likely making regular payments toward a home mortgage. There’s good news for any homeowner noting the interest on their home mortgage plan: it’s deductible.

As long as you meet the following three qualifications, you should be able to deduct all of your home mortgage interest:

  • Your mortgage was taken out before October 13, 1987;
  • Your mortgage of $1,000,000 or less was taken out between October 13, 1987, and December 16, 2017, and was used to purchase, construct, or renovate your home;
  • Your mortgage of $750,000 or less was taken out after December 16, 2017, and was used to purchase, construct, or renovate your home.

The IRS allows you to deduct interest you pay on your home mortgage, from the first $750,000 of that debt. Even if your property value exceeds that $750,000 threshold, you will not be able to deduct any additional interest past that amount. If your home was purchased before 2017, you may be able to qualify for deductions on home mortgages up to $1,000,000.

8. Necessary Home Improvements

Not all home improvements are tax-deductible. However, home improvements that are medically necessary — and renovations that make a home more eco-friendly — can often be deducted. As long as these expenses don’t exceed 7.5% of your adjusted gross income, you can deduct them by using Schedule A (Form 1040).

The IRS considers some home improvements to be medically necessary expenses. These changes include wheelchair ramps, guidance rails, elevators, and other devices that allow for improved accessibility. If you need to make any of these necessary home renovations, the expenses are tax-deductible as a medical expense.

The IRS also allows deductions on certain eco-friendly home improvements. If you make your home more energy-efficient through the use of solar panels, solar water heaters, wind turbines, or other devices, you can take advantage of these energy incentives.

9. Property Taxes

Property taxes are one of the most popular tax deductions you can take as a homeowner. The term “property taxes” can refer to two different types of taxation: real property taxes and personal property taxes.

  • Real property taxes: Also known as real estate taxes, this applies to property that is immovable. Real property taxes apply to both the land itself and any property permanently affixed to it (such as buildings). 
  • Personal property taxes: This is levied on property that can be moved, like vehicles or mobile homes.

Individual filers (or married individuals filing separately) can deduct up to $5,000 in state/local property taxes, while married homeowners can deduct up to $10,000

This limit applies to both of the above types of property taxes. For example, if you spent $7,500 in real property taxes in a year and $5,000 in personal property taxes, you could not deduct the full $12,500. You could only deduct up to $10,000 as a married person filing jointly or $5,000 when filing individually

Note that, even if the tax is collected more than, or less than, once a year, it must be charged yearly to qualify for the deduction.

If you pay property taxes, you can also qualify for residential personal property tax loans that make property tax payments even easier. Property tax loans offer a variety of benefits, helping you avoid delinquency costs and elude foreclosure. 

Applicants complete a brief survey and gain approval before taxes are paid in a simple payment process.

10. Rental Expenses

If you are renting your property to tenants, you can qualify for a variety of tax deductions. Any costs associated with the upkeep and general maintenance of your property are eligible for rental expense deduction, as long as those expenses are deemed necessary.

In addition, you can make deductions on repairs and the purchase of individual supplies used to improve the value of your property. If these expenses are covered by your tenant and you reimburse them, they can also qualify for the deduction.

11. Depreciation

Home depreciation occurs when the value of your home is reduced due to obsolescence — the natural aging process your home will experience over time. While house depreciation sounds like a negative trend, it can lead to favorable tax deductions. 

Your accountant or a tax-filing software solution can help you take advantage of the property depreciation deduction. You identify how much the value of your house — not the land it sits on — has depreciated over time.

Through primary residence depreciation, you’ll be able to earn back a portion of your home’s value lost over time. However, you can only claim this deduction on areas of your home used for business purposes, or that are rented to tenants.

Depreciation can be applied to your taxes as a legitimate deduction. It helps you earn back a portion of the money you lost to your home’s general use over time. 

Costs That Aren’t Tax-Deductible

Some home-related costs aren’t tax-deductible. Although these expenses can help improve the value of your home, or preserve the value of your home as time passes, they do not qualify as legitimate deductions.

Costs that are not tax-deductible include:

  • Homeowners association (HOA) fees;
  • Property title insurance;
  • Home insurance premiums;
  • Utility and county garbage removal costs;
  • Principal mortgage payments.

Topics: property tax loans Texas, buying a home

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