Your Home Tax Deductions
Homeowners, get excited: It’s tax season, that magical time of year when having a house actually saves you money. But just know that taking advantage of all these tax breaks can be kind of complicated, especially if you’re used to filing a 1040EZ and calling it a day. For one, with a home, it usually makes sense to itemize your deductions rather than take the standard, so that means it’s really on you to know all the niggling things that make the cut. To help you make sure you aren’t missing anything, we’ve compiled this handy home tax deduction checklist. Don’t file that return until you’re sure you’ve got ’em all!
This is the big kahuna: All of the interest you pay on your mortgage is tax-deductible for loans up to $1 million, says Mark Jaeger of TaxAct. You do have to itemize deductions to take it, but it’s almost always worth it, especially with a new loan. Most mortgages are structured so that you pay the interest first. So if you have a $300,000 fixed-rate 30-year loan at 4% interest, in your first year, you’d be deducting $10,920. (Find out how much you’ll save using our mortgage calculator.)
Private mortgage insurance
If you couldn’t make a 20% down payment on your home, most lenders require that you pay private mortgage insurance (PMI). The upside is, it’s tax-deductible as long as your adjusted gross income is less than $100,000. (For each $1,000 you make after that, you can deduct 10% less of your PMI, up to $109,000.) PMI is generally between 0.3% and 1.5% of the loan amount annually, so on a $300,000 loan, you’d be deducting between and $900 and $4,500.
If you bought or refinanced a home in 2016, you may have paid points—fees that you pay when you get your loan, either to lower your interest rate or to cover origination fees. Each point is 1% of the loan amount, so a $300,000 loan with two points would mean a $6,000 deduction for you.
Refinance points, however, have to be amortized over the life of the loan. So for that same $300,000 loan, if you’re refinancing with a 30-year fixed mortgage, you’d be deducting $200 a year for the next 30 years (or until you sell the property).
Home improvement loan interest
In addition to deducting the interest on your mortgage, if you take out a HELOC or a home equity loan that you spend improving your home, you can deduct up to $100,000 of interest on that loan. A $50,000, 15-year home equity loan at 7% interest will give you a $3,157 deduction in the first year.
Every cent you pay in property taxes has an upside: It’s deductible! Property tax rates vary in the U.S. from 0.28% to 2.38%. On a property assessed at $300,000, you’d be deducting between $840 (in Hawaii) and $7,140 (in New Jersey).
Get some green for going green: The IRS wants to give you a 30% tax credit for installing eligible solar panels, fuel cells, solar water heaters, geothermal heat pumps, and wind turbines. There is no upper limit to this credit, so if you dropped $30,000 this year on some sweet solar panels, you can take a $9,000 tax credit.
Another kind of energy efficiency credit is to take 10% of the cost of qualifying roofs, insulation, doors, windows, and skylights (up to $200 for windows and skylights). Qualifying energy-efficient biomass stoves, central air conditioning units, air source heat pumps, and water heaters are good for a $300 credit.
Furnaces and hot water boilers get you a $150 credit, and the right air circulating fan is worth $50. Just keep in mind that there’s a lifetime limit of $500 for this credit, so just make sure you haven’t maxed out already.
Home office deduction
People who have a dedicated home office may want to take the home office deduction. This was recently simplified into a standard deduction of $5 a square foot, up to 300 square feet. No more dividing up utility bills or keeping receipts. For a 200-square-foot office, that could be a nice $1,000 deduction. Be careful, though, because the IRS is strict about this deduction. “If you call it an office, but there’s a treadmill in there, that could be trouble if you’re audited,” says Jaeger.
Home sale exemption (if you sold your home last year)
If you sold your home for a profit in 2016, you’re doubly lucky, in that most of your capital gains will be tax-free—up to $250,000 single or $500,000 for a married couple filing jointly. Plus any money you spent on home improvements should get added to your home’s tax “basis.” For example, if you bought your place for $500,000, and put $200,000 into it over the time you lived there, your basis is now $700,000. If you sold the home for $900,000, you’ll pay zero taxes on that $200,000 in profits.