Mortgage Interest
You don’t want to buy a home just for the tax breaks, but they are a nice bonus. One of the big bonuses is the ability to write off mortgage interest paid during the year.
Here are the rules around the mortgage deduction. The amount of the mortgage you can claim interest on is capped at $750,000 if you bought your home after December 15, 2017.
You cannot deduct title insurance, additional payments made on the mortgage, homeowners and mortgage insurance, and reverse mortgage interest.
To claim mortgage interest, you’ll need to have Form 1098 from your mortgage lender. This will detail how much interest you paid on your loan throughout the year.
Property Tax (SALT Tax)
The federal tax code was created in 1913. During the entire existence of federal taxes, you could deduct the amount of taxes paid to state and local governments, or SALT Taxes.
That included sales taxes and property taxes paid. There was no limit to the amount of SALT tax you could deduct on your federal tax returns.
The Tax Cuts and Jobs Act of 2017 changed all of that. It placed significant limits on the amount of SALT taxes you can deduct from your federal taxes.
You can now only deduct $10,000 in SALT taxes. Many taxpayers in states with high property taxes like New York, Connecticut, New Jersey, and California will notice a significant difference on their returns.
Home Sale Profits
Real estate is supposed to go up in value. That’s one of the reasons why you want to buy a home.
Many homeowners worry that if they sell their home and make a profit, they’ll have to pay capital gains taxes on the profits of the sale.
Was your home your primary residence? Did you live there for at least two years out of the last five? You may be able to qualify for the Home Sales Exclusion.
You can exclude the profits of the sale of your home and not pay capital gains taxes. How much depends on your filing status.
Those filing as single can exclude up to $250,000 on their taxes. For those who file jointly, you can exclude up to $500,000.
Home Office Deduction
More people are working from home than ever before. Thanks to technology, people are also taking advantage of the gig economy, earning an income as a freelancer or independent contractor.
You can write off a percentage of the home that’s used exclusively for business purposes. For example, you have a 2200 square foot home and you use 150 square feet for business.
You can write off 6.6% on your mortgage payments, utility bills, and other home expenses. This will be done on your Schedule C form for your business expenses.
What if you’re an employee and you work from home as a remote worker? The Tax Cuts and Jobs Act no longer allows employees to use the home office deduction. It’s reserved for self-employed people only.
Capital Improvements
Are you making improvements to your home that increase the value of the home? You can qualify for a deduction on these projects.
There is one caveat. You can’t claim the deduction until you sell the home.
There is a gray area around what you can and cannot deduct from your taxes for capital improvements. For example, you can deduct home improvements made to give someone medical care at home.
You can’t deduct minor projects or repairs, like fixing a plumbing leak. This article has more information about capital improvements.
Should You Take the Standard Deduction?
In 2017, Congress passed the Tax Cuts and Jobs Act. This is one of the most significant changes to the tax code in 30 years.
There are a few implications for homeowners that you need to be aware of. One of them is the rise in the standard deduction.
One of the purposes of the law was to make it easier to file taxes. The standard deduction was raised from $6350 for single filers to $12,700.
For married couples filing jointly, the deduction was raised from $12,000 to $24,000.
Prior to the increase in the standard deduction, you would have to itemize your tax returns because your tax deductions were much more than the standard deduction.
Now, you may not have to itemize your taxes and just take the standard tax deduction. You should calculate your potential deductions and figure out if you are better off itemizing or taking the standard deduction.
If your tax deductions are more than the standard deduction, itemize your taxes. Most taxpayers are expected to take the standard deduction.
Take Advantage of the Tax Deductions for Homeowners
Lawmakers will write laws to encourage certain behaviors. In the case of tax law, it’s clear that legislators want you to realize the American dream and own a home.
That’s why there are numerous tax deductions for homeowners.
There are many ways to save money on your taxes and even put yourself in a position to get a refund. Don’t forget to deduct your mortgage interest, property taxes, and take advantage of the home office deduction if you’re self-employed.
Do you want more real estate tips? Come back to this site again for more helpful real estate and home articles.
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