Common Tax Breaks For Homeowners
Homeownership comes with various tax benefits, but it can also be difficult to navigate. This blog post will provide an overview of the different types of homeowners, how mortgages affect taxes, what deductions and credits can be applied to homes, whether insurance payments are tax deductible, and what environmentally friendly home improvements qualify for tax credits or deductions.
What are the different types of homeowners?
- Primary residence: A primary residence is a home where an individual or family lives most of the time. Tax benefits for primary residences are generally more generous than those for rental or vacation properties.
- Rental property: A rental property is a home owned and rented out to tenants for income. Tax benefits for rental properties may include deductions for expenses related to the property, such as mortgage interest and maintenance costs.
- Vacation property: A vacation property is a home used primarily for personal use, such as vacation or holiday homes. Tax benefits for vacation properties may be more limited than those for primary or rental properties.
How do mortgages affect taxes?
Nearly every home purchased was financed by a bank. For Americans, this means each month, they’re required to pay back what they borrowed with interest throughout their contract. However, there is some room to alleviate the payments regarding their taxes. Here are some tips:
- Mortgage interest: Homeowners who itemize their deductions on their tax return can deduct the interest they pay on their mortgage. This can be a significant saving, particularly in the early years of a mortgage when a larger portion of the monthly payment goes towards interest.
- Mortgage points: Homeowners who purchase a home may also be able to deduct the mortgage points (also known as "discount points") they paid at closing.
- Property taxes: Homeowners can also deduct the property taxes they pay on their homes as an itemized deduction.
Some simple tax breaks for homeowners
If you own a home, there are credits and deductions you can take advantage of
- State and local property taxes: Property taxes paid on a home are generally tax-deductible.
- Mortgage interest: Homeowners who itemize their deductions on their tax return can deduct the interest they pay on their mortgage.
- Investment interest: If you have a mortgage on a rental property or a second home, you can deduct the interest you pay as an investment expense.
- Charitable contributions: Homeowners who donate their home or a portion of it to a qualified charity may be able to claim a charitable contribution deduction.
Are Insurance Payments Tax-Deductible?
Homeowners, hazard, and mortgage insurance are not tax-deductible expenses, but in some cases, self-employed individuals can deduct the cost of these types of insurance as a business expense.
Medically necessary home improvements
When calculating your medical expense deductions, you can deduct the cost of installing medical equipment or other medically necessary home improvements that benefit you, your spouse, or a dependent.
Permanent improvements that increase the value of your home are only partially deductible. The amount of the property value increase is deducted from the deductible cost.
Many accessibility improvements, such as building entrance ramps, widening doorways, or installing railings and support bars, do not increase the value of a home and can be fully deducted.
Environmentally friendly home improvements and your taxes
Homeowners who make energy-efficient improvements to their homes, such as installing solar panels or a geothermal heating system, may be eligible for tax credits or deductions.
There are several tax credits and deductions that may be available for eco-friendly improvements made to your home, such as:
- Residential Energy Efficiency Property Credit: This credit allows homeowners to claim a credit of 30% of the cost of certain types of renewable energy equipment installed in their homes, such as solar water heaters, solar panels, geothermal heat pumps, and wind turbines. The credit applies to new and existing homes, and there is no cap on the amount that can be claimed.
- Nonbusiness Energy Property Credit: This credit allows homeowners to claim a credit of 10% of the cost of certain types of energy-efficient equipment and products installed in their home, such as energy-efficient windows, insulation, and certain types of heating and air conditioning systems. The credit has a cap of $500 per homeowner.
- State and Local Tax Incentives: Several states and localities offer additional tax incentives for eco-friendly home improvements. These incentives vary depending on the state and local jurisdiction, so it's a good idea to check with your state's energy office to see what's available.
Non-deductible home-owner expenses
Here's a list of expenses that homeowners cannot deduct:
- Loan assumption, credit report, and appraisal fees are costs associated with obtaining or refinancing a mortgage.
- Deposits, down payments, or earnest money are forfeited.
- Premiums for homeowners insurance.
- Fees for homeowner associations.
- Mortgage protection. (Mortgage insurance was previously deductible, but the itemized deduction has expired.)
- Rent for living in the house before it is sold.
- Stamp taxes or transfer taxes.
- Wages for domestic assistance.
How can Taxfyle help?
Navigating the complex landscape of taxes isn’t your responsibility. Throughout the year, your focus is spent on several aspects of your life. Why complicate things by learning what’s new with taxes and how the changes affect you?
With Taxfyle, you don’t need to worry about taxes. When you file with us, you feel satisfied knowing that your taxes were filed correctly by a professional. That’s because we connect individuals like you with one of our talented CPAs and EAs who know everything about tax.
Don’t be stressed this tax season. Make the best decision for your taxes and file your return with a Taxfyle Pro.