There are plenty of perks that come with owning a home, such as the potential to build equity and being able to make the place your own. However, one major advantage of homeownership is it can offer a range of significant tax benefits. Up to certain limits, you’re able to receive tax deductions for mortgage interest, qualifying home improvements, property taxes, and other expenses.
So, whether you’ve just bought your first home, or you own multiple homes in Los Angeles or San Antonio or both, you may be able to benefit from a variety of deductions this tax season. In order to receive these homeowner tax deductions, you’ll have to itemize deductions instead of taking the standard deduction. As a rule of thumb, you’ll want to itemize if the total amount of homeowner tax deductions, as well as any other deductions you qualify for, is greater than the standard deduction.
Taxes can be complicated and tricky, especially if you’re a new homeowner and aren’t familiar with the various homeowner tax benefits. That’s why you should consult with a tax professional to help determine which type of deduction makes financial sense for you.
Deducting mortgage interest is something most homeowners look forward to during tax season. This includes any interest you pay on a loan secured by your primary or secondary home (not including investment properties). Here’s how to qualify:
As a homeowner, you may be able to claim property taxes on your tax return this year. You can deduct up to $10,000 of state and local income taxes, including property taxes paid on your primary home, or any other real estate you own. If you’re married but filing separately, you can deduct up to $5,000.
When you close on your home purchase, the property’s real estate taxes are divided, so buyers and sellers each pay taxes for the part of the property tax year they owned the home. So, if you bought a home last year, these taxes would be deductible for the 2019 tax year.
Generally, home improvement projects aren’t considered tax-deductible. So don’t expect to receive a refund for your new, beautiful patio or decked-out man cave. However, here are two types of home improvements that may qualify for a tax deduction:
Active-duty military personnel can deduct certain un-reimbursed moving expenses incurred if the move was a permanent change of station (PCS), according to the IRS. Unreimbursed expenses that are considered deductible include:
Points are charges paid by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. You can claim points as a tax deduction.
When deducting points you must deduct the points over the term of the mortgage. You can, however, deduct the full amount of points in the year you paid them if you meet all the following guidelines:
If you get a home improvement loan for your primary residence and have to pay points, you can fully deduct the points if you meet the guidelines discussed in #6.
If you refinance your mortgage loan and use some of the money to improve your principal residence, plus you meet the guidelines listed in #6 above, you can deduct the portion of the points related to the improvement in the year you paid for the improvements. You can deduct the rest of the points over the life of the loan.
Did you pay interest in advance during the purchase process? If you paid a higher amount than necessary for that year, you can’t claim it all upfront. You need to spread this interest over the tax years to which it applies. Generally, you can only deduct the interest from that tax year.
Your settlement or closing statement may include a line item for home mortgage interest. You can deduct the interest that you pay at settlement. This amount should be included in the mortgage interest statement provided by your lender.
While you can’t deduct a late payment charge if you failed to make your mortgage payment on time, you may be able to deduct a late payment charge as “home mortgage interest” if the fee is not for a specific service in connection with your mortgage loan. One example of such a lender-provided service would be the completion of a home assessment or another similar service.
Some mortgage agreements include a penalty for paying off the mortgage ahead of schedule. Once again if the penalty isn’t for a specific service or cost incurred in connection with your mortgage loan, you can deduct that penalty as home mortgage interest.
The mortgage interest credit is intended to help lower-income individuals afford homeownership. If you qualify, you can claim the credit each year for a portion of your mortgage interest.
If your mortgage includes PMI – because your down payment on the home purchase was less than 20% – you might be able to deduct the PMI. Depending on your loan type, there are other fees similar to PMI that can be a deduction. A loan through the Veterans Administration has a funding fee. A loan through the Rural Housing Administration has a guarantee fee. These can be deducted in the year they were issued.
There are, however, limitations to PMI tax deductions. You must allocate your PMI deductions over the term of the mortgage or 84 months, whichever time is shortest. These limitations do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service.
Originally published on Redfin