TAX DEDUCTIONS FOR HOME OWNERS
By Jessica Hudson | January 1, 2021
One of the nice things about owning a home is that you may be able to offset some of the annual cost with a variety of tax deductions. These tax deductions can save you money by reducing your taxable income, which means you pay less in income tax. Depending on your situation, tax deductions for homeowners may save you thousands of dollars each year.
For most, the biggest home-related tax deduction is mortgage interest. You should receive a Form 1098 statement from your lender by the end of January listing the mortgage interest you paid during the previous year. It may be attached to, or part of, your January statement so make sure you take a close look. The amount shown as interest paid on Form 1098 is the amount you can deduct on your tax return. You can deduct the interest on up to $750,000 of mortgage debt (or up to $375,000 if you’re married filing separately).
Home Equity Loan Interest
Interest on home equity loans and home equity lines of credit can be deducted, but only if you spent the borrower money on home improvements. Your home equity loan or HELOC debt counts toward the total mortgage debt limit for deducting interest.
Real Estate Taxes
You can deduct annual real estate taxes based on the assessed value of your property by your city or state. Beginning in 2018, the total amount of state and local taxes, including property taxes, that you can deduct is limited to $10,000 per year.
When you buy a house, you might have paid points to the lender to get your mortgage or to get a specific interest rate. These points can usually be deducted as prepaid interest. You may deduct any points you paid, or points the seller paid on your behalf, in the year in which you paid the points, if you meet all of these requirements: your loan is secured by your primary residence; the amount of points paid is usually for your area; you use the cash method of accounting for expenses (you most likely do); the loan was used to buy, improve or build you home; the points are computed as a percentage of the loan principal; the points are clearly identified on your settlement statement; your down payment is equal to or greater than the amount of points paid.
Mortgage Insurance Payments
Homeowners you pay private mortgage insurance on loans originated after 2006 can deduct their premiums if they itemize. The deduction is phased out if your adjusted gross income exceeds $100,000 and disappears if your AGI exceeds $109,000 ($50,000 and $54,500, respectively, if you’re married filing separately).
If you make any improvements to your home, the expenses aren’t tax deductible for the current year. But when you sell the home in the future, they can help lower your tax burden then. That’s because you can add home improvement expenses to your adjusted basis. This is generally what you paid to buy the house, plus the cost of construction, renovation or other improvements you’ve made, minus any loses you’ve experienced from damage to the home. The higher your adjusted basis, the less taxes you may have to pay on your profit from the sale.
You may deduct home office expenses if you’re self-employed and use part or your home regularly and exclusively for your business. You can use the IRS “simplified method” or your actual expenses to figure out the deduction amount for home office expense. The IRS website provides details about determining whether you home office qualifies for a tax deduction and has worksheets for calculating the deduction amount.
Medically Necessary Home Improvements
When figuring out your medical expense deductions, you can include the cost of installing health care equipment or other medically necessary home improvements that benefit you, your spouse or a dependent. Permanent improvements that increase your home’s value are only partly deductible. The deductible cost us reduced by the amount of the property value increase. Many improvements to make a home more accessible, such as constructing entrance ramps, widening doorways or installing railings and support bars, usually do not increase the value of a home and can be fully deducted.