Tax Deductions for Homeowners

There’s no getting around it, homeownership can be expensive. Plus, with the historic rise in home prices, it has gotten even harder to become a homeowner. One thing to remember though is that owning a home also comes with some tax deductions that can be very helpful. Just in time for tax season, here are some tax deductions you can only tap into if you own a home.

1. Mortgage Interest Deduction

For most people, the biggest tax break of homeownership comes from deducting mortgage interest. As a homeowner, you can deduct interest on up to $750,000 of debt on your home if you file jointly. If you are single, or, married and filing separately, you can deduct up to $375,000. If you are one of the lucky people who has a mortgage from before 2018, you can deduct up to $1,000,000.

2. Mortgage Interest Credit

Some low-income homeowners may qualify for both a mortgage interest deduction and a mortgage interest credit.  However, you have to been issued a qualified Mortgage Credit Certificate (MCC). The credit amount can range from 105-50% of mortgage interest paid through the year. Be warned that there are a number of restrictions on this credit. If you claim it, it’s also possible your mortgage interest deduction will be lower. Talk to a tax expert for more information.

3. Property Tax Deduction

Homeowners get hit with property taxes every year (payable either twice a year or monthly if you have an impound account with your mortgage company). Depending on where you live, this can be a significant expense! Especially in an area so close to the beach like Long Beach. However, you can deduct state and local property taxes on your federal income tax return. You do need to itemize them on your tax return and there is a $10,000 deduction limit. If you are single or married but filing a separate return, the limit is $5,000. This tax break can be more helpful in states with lower property taxes, but every deduction counts, so don’t forget to include it on your tax returns.

4. Rental Expenses

The following applies only to homes that the owner also lives in! There are separate tax rules for second homes or investment properties.

Here in Long Beach, there are many duplexes, triplexes, and homes with ADUs. While rental income gets taxed, expenses for a rental can be deducted. These expenses can include real estate taxes, insurance, repairs, general maintenance costs, etc. You can also deduct some utility costs, but this can be harder to calculate since you are also contributing to utility use.

5. Capital Gains Taxes

The capital gains tax deduction is one of the more confusing ones. Basically, if you sell your home for a profit, you don’t have to pay capital gains taxes. However, the sale does need to meet the criteria below.

1. You have owned the home for at least 2 of the last 5 years.
2. You have lived in the home for at least 2 of the last 5 years.
3. Finally, you haven’t used this exclusion to shelter gain from a home sale in the last 2 years.

When filing as a married couple, you are not taxed on up to $500,000 in gain. Or, up to $250,000 for single filers. Keep in mind, you only get to deduct the profit you made on a home sale. So if you buy a home for $500,000 but sell it for $600,000, you don’t have to pay taxes on the $100,000 profit. Again, consult with a tax professional for details on how these rules apply to your situation.

Bottom Line

We are not suggesting that you purchase a house just to save on your taxes. However, if you have recently become a homeowner, you will want to know the expenses you can deduct! Hopefully, this guide is a good start for you. If you need a referral to a tax expert, we can point you in the right direction. Please give us a call at 562.896.2456 or fill out the form below.