Maximize Your Deductions

8 Homeowner Tax Deductions You Should Know About

By SaleCore - BHHS PenFed Realty

Homeownership is a great investment, and rewarding in so many ways…building equity, making a house your home, and significant tax benefits. As such, knowing what you're eligible for is the first step in saving as much as possible. Taxes are complicated and unique to each individual’s/ couple’s situation. In order to maximize your homeowner deductions, it’s important to consult with a tax professional to help determine which deductions make the most financial sense for you. In general, however, when you itemize your deductions, you will be able to deduct the following:

Couple reviewing their deductable mortgage loan interest

1. Mortgage Loan Interest

One of the biggest and most substantial tax incentives involves the mortgage payment you make each month. A portion of every payment goes toward the interest on your loan. You can deduct the interest you paid up to a limit, which depends on when you took out the mortgage. This includes any interest you pay on a loan secured by your primary or secondary home, but does not include investment properties.

Illustration representing mortgage points

2. Mortgage "Points"

When purchasing or refinancing a home, homeowners may opt to buy “discount points” to lower their mortgage interest rate. These points may be deducted, if you are within the limit to deduct all your mortgage interest. When deducting points, you must typically deduct them over the term of the mortgage, unless a series of guidelines are met to deduct the full amount in the year you paid for them. However, “loan origination points” go toward paying the lenders’ costs for providing the loan, and are therefore not tax-deductible.

Homeowner holding private mortgage insurance contract

3. Private Mortgage Insurance (PMI)

Lenders require private mortgage insurance when homeowners don't have at least 20 percent equity in their home, and covers the lender in the event of default. Fortunately, the mortgage insurance on a principal residence or second home is deductible. There are, however, limitations to PMI tax deductions. You must allocate your PMI deductions over the term of the mortgage or 84 months, whichever time is shortest. In addition, depending on your loan type, there are other fees similar to PMI that can be deducted. For example, loans through the Veterans Administration has a funding fee, and loans through the Rural Housing Administration has a guarantee fee. These can be deducted in the year they were issued, and are not subject to the same limitations as PMI.

Conceptual image representing property taxes

4. Property/Real Estate Taxes

As a homeowner, you may be able to claim property taxes. In addition, when you close on your home purchase, the property’s real estate taxes are divided, so buyers and sellers each pay taxes for the part of the property tax year they owned the home. Generally, you can deduct real estate taxes if you pay taxes either at the time of closing, or to a tax authority such as your county or city tax assessor's office. You can deduct property taxes on your primary residence, your second home, land or foreign property.

Conceptional rendering showing how home solar energy works

5. Home Improvement

In general, home improvement projects are not considered tax-deductible. Permanent improvements that increase your home’s value are only partially deductible. The deductible cost is reduced by the amount of the property value increase. There are, however, a few areas that may qualify for a tax deduction:

  • The interest on home equity loans and home equity lines of credit can be deducted, but only if used to buy, build, or substantially improve the home that secures the loan. Your home equity loan or HELOC debt counts toward the total mortgage debt limit for deducting interest.
  • Medically-necessary improvements can be deducted as a medical expense. For example, the installation of a wheelchair ramp or modifications to a bathroom shower or doorways due to an illness or medical disability would qualify.
  • Any energy-saving improvements may be tax deductible. Specifically, solar improvements could qualify for a credit up to 30 percent of the total cost, including installation, with no set limit.
Happy homeowner working from home office

6. Home Office/Business Expenses

If you’re self-employed and use part of your home exclusively for business, you may be able to deduct home office expenses. Calculation of your home office deduction is based on the percentage of the home devoted to the business. Deductible expenses include a percentage of the mortgage interest, real estate taxes, insurance utilities, repairs and depreciation. However, do so cautiously, as some experts warn that large deductions in this category can sometimes trigger an audit.

Moving truck traveling down the highway

7. Moving Costs

Homeowners who must relocate 50 miles or more for business, from their previous home, may qualify for a residential moving cost deduction. Deductible expenses include the costs associated with the move and traveling, but meals are not typically included. In addition, active-duty military personnel can deduct certain un-reimbursed moving expenses incurred if the move was a permanent change of station (PCS). These expenses may include:

  • The cost of a moving company or rental truck for transportation of belongings to a new location.
  • Travel expenses incurred along the way, including lodging and airfare.
  • Storage and insurance of belongings for up to 30 consecutive days after the move from your old residence, and before arrival at the new residence.
Home damaged from a storm

8. Accidental Loss

Homeowners who have had the extreme misfortune of going through a sudden, unexpected or unusual event (for example, property damage as a result of a natural disaster), may be able to deduct a portion of the loss. In general, if your losses exceed more than 10 percent of your income, you can deduct whatever your insurance doesn't cover.

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