Maximize Tax Savings With Home Related Deductions

Jen Guidry > Blog > Maximize Tax Savings With Home Related Deductions

Tax season is here, but there is still time for homeowners to maximize their tax savings. Here are tips to help you reap home-related deductions. 

Disclaimer: Please consult your tax advisor before taking any of these deductions.

The Holy Grail of All Tax Deductions: Mortgage Interest

The most significant tax deduction available for many people is based on the interest paid for their home mortgage. The mortgage tax deduction is for interest paid on loans for no more than two residences. That can be any combination of a primary residence, second home, vacation home, or potentially even a boat, or recreational vehicle, provided there are plumbing and a bathroom. 

For those lucky enough to own more than two properties, make sure to use the property deductions for the property that yields the largest tax deduction. People often assume that the biggest mortgage payment produces the most significant tax deduction, but that is not always the case. Generally, more of your payment is applied to the principal and less to interest, the longer you’ve had your mortgage. 

If you had your mortgage before December 15, 2017, it is grandfathered under the old rules for home acquisition debt of $1 million or less. The rules have changed since then, and now, married couples are limited to debt of $750,000 when accounting for mortgage deduction. 

The Dreaded Home Office Deduction

The Home Office Deduction has been used and abused, which is why it has rightfully earned its reputation as a potential audit trigger. That doesn’t mean you should completely ignore this often valuable tax deduction for self-employed homeowners. If you are reasonable and use a room (or rooms) in your home exclusively for business, you should consider it. If you are actually using half your home to run your business, make sure you document your use and expenses and take the home office deduction. 

Don’t try to claim half your home for a side hustle that barely brings in money. This is especially true if you live with your wife and 12 children. Unless your home is huge, it will be hard for an IRS auditor to believe you actually dedicated 50% of your home exclusively to your business. 

In 2013 a simpler and easier way to estimate home office deduction was enacted. It allows homeowners to deduct $5 per square foot of home office space, but the entire deduction is limited to $1,500. While I don’t think a $1,500 tax deduction will change your life, it will save you money and time versus the hassle of tracking every little expense. 

Do You Use Airbnb or Have Roommates?

In recent years, more people have turned their homes into cash machines by renting rooms in their homes, both short-term and long-term. (Golden Girls anyone). Part-time landlords often miss out on tax breaks that benefit landlords who rent their entire properties. 

First, I would like to point out that yes, the profit you make renting out a room in your home is taxable. Anything more than 14 days in a given year needs to be reported to the IRS, and taxes may be due. If you have reported income, you may also have some tax-saving deductions. Landlord expenses may be prorated depending on rental frequency. You may be able to deduct some costs as a landlord, such as patio furniture, internet, cable, house cleaning, and even pool maintenance or laundry.

Do Good for the Environment, Get A Tax Break

There is a slew of tax deductions for making your home more energy-efficient. I won’t bore you with a ton of details, but if you’ve done a good deed for the environment, make sure you get your tax savings. Before taking on a green project, make sure to check, double-check, and triple-check the specific requirements and deadlines required to receive any potential tax breaks. Think of things like solar panels or drought-tolerant landscaping; even rain barrels may qualify. 

Are Home Improvements Tax Deductible?

The answer depends on the kinds of improvements you’ve made and how well you’ve kept track of your expenses. 

When you make a home improvement, such as installing central air conditioning or replacing the roof, you can’t deduct the cost in the year you spend the money. But, if you keep track of those expenses, they may help you reduce your taxes in the year you sell your house.

Money you spend on your home breaks down into two categories, tax-wise: the cost of improvements versus the cost of repairs.

You will want to keep extremely accurate records regarding your home improvements and consult with your tax professional to learn how to take advantage of the deductions.

Tax Break When You Sell Your Home

The rules for taxation of a home sale are pretty clear cut, yet we continue to see much confusion around this topic. 

Thanks to the Taxpayer Relief Act of 1997, most homeowners will not owe any capital gains taxes on profits when selling their primary residence. The short version of the rule is that if you have lived in your primary residence for two of the past five years, you can exclude up to $250,000 of profits from being taxed. If you are married, that number doubles to $500,000. 

Your profit on a home may not be as straightforward as subtracting your purchase price from your sale price. For example, if you paid $250,000 for your home 20 years ago and sold it for $1 million, your profit for tax purposes is not necessarily $750,000. You will likely have closing costs and commissions for realtors. Also, keep in mind any home improvements you may have made over the years, which can also increase your home’s cost basis. 

Over the long-term, owning a house can be a great way to build wealth. However, it has the potential to be a budget-buster along the way. Getting some nice tax breaks could help to ease the pain of paying for a new water heater or sewer pipe. Maintaining good records will make finding your tax deductions easier come tax time. Also, keep a list of home improvements. They will help to minimize further taxes owed when you eventually sell your home. 

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