Homeownership can be expensive and may even feel out of reach for many Americans. The down payment, property taxes, maintenance, and utilities, plus mortgage and interest payments can really add up. Throw in a real estate market with sky-high home values; you may be wondering if owning a home is worth it. Luckily, there are a few tax deductions for homeowners that can help make homeownership a bit more affordable.
Here are a few tax questions I often hear from homeowners:
Can I Still Deduct My Mortgage Interest?
If you have a mortgage on your home, you can take advantage of the mortgage interest deduction. You can lower your taxable income through this itemized deduction of mortgage interest.
Homeowners can deduct up to $750,000 as a single filer or married couple filing jointly. If you are married but filing separately, the deduction limit is $375,000 for each party. The only mortgage interest that isn't deductible within these limits is debt that wasn't used to buy, build or improve a home. So interest on additional equity taken out to consolidate debt wouldn't be tax deductible.
Is A Home Equity Loan Interest Deductible?
A home equity loan is essentially a second mortgage on your house. With a home equity loan, you can access the equity you’ve built in your home as collateral to borrow funds that you need for other purposes.
Like regular mortgage interest, you can deduct the interest you’ve paid on home equity loans and home equity lines of credit. However, you can only claim this deduction if you used the borrowed funds to pay for a home improvement.
Can I Deduct Property Taxes?
As a homeowner, you’ll face property taxes at a state and local level. You can deduct up to $10,000 of property taxes as a married couple filing jointly – or $5,000 if you are single or married filing separately.
Are Home Improvements Deductible?
Necessary home improvements can qualify as tax deductions. Of course, the definition of “necessary” is somewhat limited. If you upgrade your fully functioning kitchen, those improvement costs may not qualify.
However, if you have to make permanent improvements to make your home more accessible for medical reasons, that should qualify. A few examples might include installing medical equipment, railings or widening doorways for an accessible home.
What Can I Deduct On Home Office Expenses?
If you operate a business in your residence, you may be able to deduct some of the expenses of maintaining that space. The IRS requires that you use your home office for regular and exclusive business use in order to qualify for a deduction. If you only use the office space when it is convenient, or just for working from home for your employer, that will not qualify.
In terms of the deductions, the size of the deduction is based on the percentage of your home dedicated to the place of business.
What About Capital Gains When I Sell My Home?
Capital gains tax breaks come into play when you sell your home for a profit. The capital gain is the difference between the value of the home when you bought it and when you sold it. For example, let’s say you bought your home for $100,000. A few years later, you sell your home for $150,000. With that deal, you walk away with a capital gain of $50,000.
If you used the home as your primary residence for 2 of the last 5 years, you could keep some profits without any tax obligation. As a married couple filing jointly, you can keep up to $500,000 in capital gains. As a single filer or married couple filing separately, each party can keep up to $250,000 of capital gains without a tax obligation.
The key is that you lived in the house for 2 of the last 5 years. With a big tax break on the table, it’s important to take the rules that apply to this deduction seriously.
Dean Powell
Keller Williams Realty
CA DRE # 02108792
925-765-8584