Owning a house comes with numerous benefits but also entails various expenses. From mortgage payments and annual property taxes to repair and maintenance costs, there are financial burdens associated with homeownership. However, deducting a portion of these expenses when filing taxes annually can alleviate some of the financial burdens. So, what exactly is a tax deduction for homeowners? How can one apply and what expenses can be deducted? Let’s explore!
What is a Tax Deduction?
A tax deduction is a portion of money you can subtract from your income to reduce the amount of taxes owed. For homeowners, the law permits deductions for certain expenses related to homeownership, such as mortgage interest, property taxes, home office expenses, repair costs, etc., which can alleviate annual financial burdens.
Types of Expenses Eligible for Deduction
Mortgage Interest
The portion of interest on your mortgage that qualifies for deduction may vary based on marital status and your tax-filing method. The deducted amount cannot be reinvested in purchasing other properties; however, it can be utilized for home maintenance and improvements. Any expenses unrelated to property purchase or paying off secondary mortgage debt are acceptable.
Home Office Expenses
If a homeowner uses a part of their residence for business purposes, the portion of land-related costs corresponding to the office’s space can be deducted. Specifically, if the workspace comprises 20% of the total house area, then 20% of the relevant expenses, such as utilities or maintenance, can be deducted.
Home Repair Costs
Improvements like solar, wind energy systems, geothermal, which qualify for a credit of up to 30% of equipment costs, can be credited. Installation of charging stations, insulation, HVAC, or water heaters might qualify for smaller credits to enhance efficiency and electrification. All remodeling or refurbishments that make your home more habitable are tax-free, such as ramp installation, kitchen renovations, repainting, or similar changes indoors.
Capital Gains Tax Deduction from Selling a Home
If you sell your house for a higher price than what you bought it for, you can deduct a portion of the profit from your taxable income.
When you sell something, the IRS is usually there to take a cut. It’s no different when you sell a house. When you finalize the paperwork and hand over the keys to the buyer, a percentage of your profit is handed over to the IRS.
How to Claim Homeowner Tax Deductions
The deduction process begins by tracking your expenses throughout the year. Keep all receipts, bank statements, loan documents, and invoices documenting standard expenses.
During tax season, tally your deductions and report them on IRS Form 1040’s Schedule A when you file. The IRS reviews to verify appropriate expenses and deduction limits. Once approved, standard expenses are subtracted from your annual income.
Owning a home not only provides a place to live but also offers beneficial tax deductions. Maintain clear records of related expenses and report them come tax season using tax software or with the help of an experienced tax professional. The savings you receive make homeownership a more financially sensible choice!
