Please note that the information in this post is provided for general informational purposes only and is not intended to be construed as legal, financial or tax advice. Please consult a licensed professional for information unique to your situation. Information contained in this post is as of time of publication in January 2023 and is subject to change based on changes in laws and tax codes.
Homeownership continues to be a reliable avenue for long term wealth building. Year over year equity gains contribute to the majority of Americans’ overall wealth. A 2022 report from CoreLogic put the average equity per homeowner at a record high $300,000! While most experts expect the housing market appreciation rates to slow down with the recent market shift, it is clear that the long term financial benefits of owning your home are undeniable.
In addition to the long term financial benefits, it is important not to overlook the annual benefits homeowners can realize when filing their tax returns! Here are a few items to discuss with your tax preparer/ financial advisor to see how they might be able to benefit you as a homeowner (and one that even renters may be able to take advantage of!)
Mortgage Interest is Tax Deductible
Mortgage interest is usually the largest deduction available to homeowners who itemize their deductions. You can currently deduct mortgage interest amounts on loans up to $750,000 taken after December 14, 2017. (this loan limit amount was $1M prior to the Tax Cuts and Jobs Act of 2017 and loans taken before the cut-off date are grandfathered in).
Mortgage interest is no longer deductible on home equity loans through 2025 unless the funds were used to substantially improve the property.
Additional, more detailed information on the mortgage interest deduction can be reviewed here on the IRS Publication 936.
Deducting Property Taxes
State and local real estate taxes are also tax deductible for itemizing tax payers. You can deduct up to $10,000 of state and local taxes; including property taxes and the choice of income or sales taxes.
Self-Employed Home Office Deductions
The home office deduction isn’t available to all taxpayers, but this one is not exclusive to homeowners, it can also be taken advantage of by renters. Simply working from home isn’t enough to qualify you (bummer, I know! Especially with the amount of remote workers that there are since the pandemic started).
The IRS allows the home office deduction to small business owners; including those who are self-employed, but there are certain criteria that has to be met. According to the IRS, there are 2 basic requirements for the taxpayer’s home to qualify as a deduction:
- There generally must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
- The home must generally be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.
There are several expenses that can be claimed as part of the home office deduction; including, but not limited to mortgage/ rent payments, interest and taxes, insurance, utilities, repairs, maintenance and depreciation. Taxpayers should be cautioned to be careful to not double-dip by claiming the same mortgage interest and real estate tax deductions on Schedule A and the home office deduction Form 8829.
Capital Gains Exclusions
When selling a home, taxpayers are exempt from paying capital gains taxes on any profits made up to $500,000 for married couples or $250,000 for single filers as long as the property has been the primary residence for two (2) of the last five (5) years under present law.
As a homeowner, you will want to save receipts for costs associated with maintaining and improving your home, as these can be used to reduce potential capital gains upon sale of the property by adding to your cost basis for the property. Things to consider for this include the closing and financing costs when you purchase the property, items such as new appliances, landscaping, new roofs, windows, additions, finished basements, etc. The costs of selling your home, including commissions, staging, painting, etc. are also considered when calculating your cost basis.
Don’t leave money on the table (or in the pockets of the US Treasury) and consult a professional tax preparer to see what credits and deductions you are eligible for. Keep all receipts and important homeownership related documents together in a safe and convenient place! I’m happy to provide recommendations for professionals I trust as well as strategies for keeping important information organized, please don’t hesitate to reach out!
About the author: Jennifer is a real estate agent licensed in Florida and Colorado. She has helped buyers and sellers move in and out of their homes for over 10 years in the southern Denver metro area as well as the greater Tampa Bay area. If you are thinking of buying or selling your home, she can be reached by phone at 720-838-4513 or email at firstname.lastname@example.org If you don’t live in these areas, reach out and she can help find the “Jennifer” in your area!
I'm Jenn and I love helping buyers and sellers achieve their real estate goals and find the perfect HOME for their unique situations. I also work hard to make sure my clients are educated about the process, their options and responsibilities so they can make well informed decisions before, during and after buying their home!
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