Owning a home has a lot of perks and, if you’re willing to be diligent and itemize your taxes, there are a few breaks you may be able to take advantage of. This info is a great start, along with the help of a tax professional.
If you have a mortgage up to $750,000 on your property and you pay interest on it, all or a portion of the interest may be tax deductible. To write it off, you have to live in the property and the mortgage must be used to buy, build, or improve your home. You can also deduct mortgage interest if you have a mortgage on a second home, but you can’t deduct interest on an investment property.
You get the greatest tax benefits in the first few years of your mortgage since it’s when you pay the most interest. As you pay the principal balance down, your total interest paid decreases, which lowers your deduction.
You can deduct interest paid on home equity loans or lines of credit, but only if they’re used to improve, renovate, and/or repair the property. If you use the loan proceeds to consolidate debt or pay for medical bills, you can’t deduct the interest paid.
When you take out your mortgage, you may pay points to buy the rate down. It’s optional, but many people do it if they know they’ll be in the home for a long time. They want to pay less interest over the life of the loan, so they prepay the interest in the form of points. As long as the money you pay for points is used to lower your interest rate, and there aren’t any other fees or discounts lumped in to give you a deduction, you can write them off.
One of the largest fees you pay when you own a home is real estate taxes. Starting in 2018, the total amount of deductible state and local income taxes, including property taxes, is limited to $10,000. So, if your real estate taxes are $12,000, you can only write off the first $10,000. But if your taxes are $5,000, you can write off the entire amount.
If you pay mortgage insurance on your loan, you can write it off. You may pay mortgage insurance if you have a conventional loan and put down less than 20%, or if you took out an FHA, USDA, or VA loan. Some mortgage insurance is monthly; some is paid upfront. Your end-of-year mortgage statement from your lender will show how much you paid in mortgage insurance.
If you need to make changes to your home to make it more accessible for yourself or a family member, you may be eligible to deduct the expenses. You can also only deduct medical expenses up to 7.5% of your adjusted gross income and that includes all medical expenses, not just medically necessary home improvements.
(Note: You can only deduct the cost of the improvements that help you or your family member medically. If any changes you make also increase your home’s value, those changes can’t be deducted).
The past few years have seen an unprecedented number of people working from home, but that doesn’t necessarily mean you can deduct your home office and/or expenses. If you’re an employee working remotely, you currently don’t qualify for a deduction. If you’re self-employed, however, you may be able to take advantage of deductions, so check out this TurboTax guide for more info.
Called a capital gains deduction, if you live in your home for at least two of the last five years, you can exclude the first $250,000 in profits if you’re single, and $500,000 if file jointly.
If you’re looking for more than the standard deduction for owning a home, itemizing is the way to go—with the help of a tax professional. Tax rules and laws can be particularly nuanced, so it’s best to work with someone educated and experienced to help you make the most of owning a home and decrease potential liabilities. Wyndham Capital Mortgage does not offer tax advice. Please consult with a qualified tax advisor regarding the deductibility of interest in your situation.