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9 Tax Deductions For Homeowners: These are the nine key tax deductions every homeowner should be aware of.
1. Mortgage Points Deduction: Consider purchasing mortgage points to save money on your mortgage and write off interest. Mortgage points, or discount points, are bought upfront at closing. Use Form 1098 from your lender to claim the deduction on line 10 of Form 1040 Schedule A. Your accountant or tax software can assist you.
2. Mortgage Interest Deduction: The mortgage interest deduction allows you to deduct interest paid on up to $750,000 of qualified residence debt for a primary or secondary home. This amount is reported on Form 1098 and should be included on Schedule A of the 1040 form.
3. Property Tax Deduction: Homeowners pay property taxes based on location and home value. These taxes support public services. If you itemize your tax return, you can deduct up to $10,000 (married filing jointly) or $5,000 (single/separately) annually using Schedule A of the 1040 form.
4. Rental Deductions: Are you aware that you qualify for a rental deduction if you lease a portion of your home, like a garage apartment, basement, or extra bedroom? Although you'll need to pay taxes on the rental income, you can offset some expenses by deducting costs related to maintenance and repairs, insurance, utilities, and other rental-related expenses.
5. Home Office Deductions: If you're a self-employed homeowner, you may deduct business expenses if you meet IRS criteria, like using the space solely for work. You can calculate deductions using actual expenses (maintenance, utilities, etc.) with receipts or a simplified method of $5 per square foot. For example, a 200 square foot office qualifies for a $1,000 deduction.
6. Home Improvement Deductions: Home improvement projects can enhance your home's value and many qualify for tax deductions as capital improvements. These include swimming pools, home additions, garages, new roofs, central air systems, water heater upgrades, and security systems. While you can't deduct these expenses, they increase your home's cost basis, impacting capital gains taxes when selling. Keep records of major improvements, and consult a tax specialist to determine eligibility.
7. Energy-Efficiency Deductions: Upgrading your home to be more energy-efficient can lead to savings on both utility bills and taxes. The Residential Renewable Energy tax credit permits you to receive credits for installing solar, wind, geothermal, or fuel-cell systems. Eligible energy-efficient improvements for this tax credit include solar water heaters, solar panels, wind turbines, and geothermal heat pumps. The Inflation Reduction Act of 2022 provides significant new incentives to motivate homeowners to adopt renewable energy sources.
8. Deductions For Accessibility Improvements: Home improvements for accessibility for household members with disabilities may qualify for tax deductions. IRS Publication 502, under Capital Expenses, outlines deductible improvements. Deduct expenses for accessibility minus any home appreciation. Business owners can refer to the ADA's fact sheet on tax incentives for business accessibility improvements.
9. Capital Gains Tax Exclusion: When selling your home, you likely won't owe capital gains tax due to the Taxpayer Relief Act of 1997, if you qualify. You must have lived in and owned the home for 2 of the past 5 years and not used this exclusion in the last 2 years. Joint filers are exempt on profits up to $500,000, and individual filers up to $250,000.
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