Buying and selling a home can have a significant impact on your tax situation, including what and how much you can deduct on your income taxes. While certain tax breaks are only available to homeowners, renters too, may be eligible for home-related deductions. Here’s a look at a few common expenses that the IRS allows you to deduct when you own (and in some cases, rent) your home.
The mortgage interest deduction allows homeowners to reduce their taxable income by up to $750,000* for the interest paid on their mortgage. This limit applies to single tax filers and couples who file jointly. Mortgage interest is an itemized deduction. In other words, you'll have to itemize on your taxes instead of taking the standard deduction.
If you paid more than $600 for mortgage interest in a year, you'll receive a Form 1068 Mortgage Interest Statement from your lender. These forms typically arrive in December in time for tax filing season.
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*The $750,000 limit applies to mortgages taken out after December 15, 2017. The deduction is worth up to $1,000,000 for interest paid on mortgages taken out prior to December 15, 2017.
As a homeowner, you typically pay personal property taxes to your state, county and other local authorities throughout the year. When you file your federal income tax return, the IRS allows you to deduct these personal property taxes up to a certain limit.
Specifically, the tax law says that you can deduct up to $10,000 for all state and local taxes combined. So, if you also plan to deduct your state income or sales tax, these will also count toward that $10,000 limit. It's important to note, too, you can only deduct the property taxes actually paid during the year you're filing.
To deduct your property taxes, you'll need to itemize your taxes instead of taking the standard deduction. If your property taxes are paid out of escrow, you'll find the amount paid on Form 1098 Mortgage Interest Statement. Otherwise, your local tax authority may also provide a copy of the property tax bill for your home to use for your tax records.
If you recently bought or sold your home: If you sold your home partway through the year, you can usually deduct any property taxes paid during the tax year—prior to the sale. Likewise, if you bought a home during the year, you can deduct the property taxes paid during the tax year – since the purchase.
Renters: If you pay property tax as part of your lease agreement, you may be able to deduct that amount on your taxes. The same requirements and limits apply to the deduction whether you own or rent your home.
Some homeowners choose to buy discount points from their lender to lower their mortgage interest rate. The IRS will let you fully deduct those points the year you paid them if you meet the following requirements:
- You used the loan to purchase or build your main home (where you live most of the time).
- The use of points must be a normal business practice in your area.
- You did not borrow funds from your lender to pay the points.
- The amount paid for points must be clearly itemized on your mortgage statement, and
- The amount is a percentage of your mortgage principal.
- The amount paid is typical (not more than what is usually charged) in your area.
- You use cash accounting on your taxes (you report income in the year you receive it and deduct expenses in the year you pay them).
- The points weren't used for stand-alone items like appraisal fees, property taxes, etc.
You can also deduct points paid on a loan used to improve your main home. The requirements listed above still apply.
If you are self-employed and have a space in your home entirely dedicated to your business/work, the IRS may allow you to deduct home office expenses. The amount you're allowed to deduct depends on how big your space is and what method you use for calculating the deduction.
For instance, using the simplified method, you'll measure the square footage in your home office and multiply by the current flat rate (In 2020, you could deduct $5 per square foot of home office space, up to 300 square feet). Using the standard method, you'll calculate the space as a percentage of total square footage in your home and deduct a percentage of related expenses.
Renters: The home office deduction is available to both renters and homeowners who meet the IRS requirements. Read those here.
For a complete list of filing requirements, limits and special cases for each of these deductions, visit the IRS website at www.irs.gov.