There are so many benefits to homeownership. It builds long-term wealth, provides stability to your family, and you have the freedom to paint the walls any color you’d like without fearing the wrath of a landlord. But, there is another benefit that attracts homebuyers more than the rest; the tax breaks.
Tax breaks may vary from year to year and state to state, but they are available. Before we jump in, we must disclose that we are not accountants or tax professionals of any kind, these are only deductions that are possible. This is in no way an official list nor does it mean everyone is guaranteed to receive these deductions, and you should consult a tax professional to help you prepare your taxes and verify that you do in fact qualify for these tax breaks. If you plan to file your taxes yourself, either online or on paper, we also suggest that you also ask a tax professional what forms are needed to claim these tax benefits. Now that we have that out of the way, let’s take a quick look at some of the tax breaks available to homeowners in 2021.
One of the biggest deductions you can take is your state and local property taxes. The maximum amount you can deduct has been reduced. It now caps at $10,000 per year.
For mortgages issued after December 15, 2017, the first $750,000 of interest on mortgage debt can be deducted. This deduction is not limited to your primary residence and can be used for second homes as long as you stay under the maximum amount.
If you’ve had your mortgage since before December 15, 2017, you can deduct up to $1 million of mortgage interest on up to two homes.
When you take out a mortgage, you usually pay “points.” If the mortgage is used to buy, build or improve your primary residence, the points may be deductible in the same year you pay them.
You cannot deduct points that were paid for as part of a mortgage on a second home, but you are still able to receive a small benefit. You can deduct $33 for every $1,000 of points that you paid. Better than nothing, right?
Homeowners who put less than 20% down on their homes must pay mortgage insurance. While the fee itself can be costly, you can deduct the premium from your taxes as long as your adjusted gross income is less than $100,000 per year.
Mortgage Interest Tax Credit
Low-income homeowners may be able to receive a mortgage interest tax credit. This is in addition to the mortgage interest tax deduction. Homebuyers who are qualified for this credit should receive a Mortgage Credit Certificate from either the state or local government to help fund the purchase of their primary residence. The amount of this credit ranges from 10%-50% of the total mortgage interest paid throughout the year.
Foreclosure or Short Sale Forgiveness
If you had the misfortune of selling your primary home through short sale or foreclosure, the amount of debt that was forgiven, up to $2 million, is tax-free. This is a big deal because usually when debt gets forgiven, it is taxed as if it were part of your income.
If you are self-employed, you may be able to deduct home office expenses. Your home office needs to be a space exclusively dedicated to performing your job. If you have such a space, you may be able to deduct utilities, repairs, and depreciation.
It is very important to point out that this deduction is not available to those who work remotely for a larger employer.
Suppose you install energy-efficient equipment into your home. In that case, you can deduct 26% of any solar, geothermal, biomass, or fuel cell system used to create electricity, heat water, or regulate the temperature in your home.
Deduction of Medically Necessary Home Improvements
A little-known deduction homeowners can take is the cost of making improvements to your home that are needed for medical reasons. This could include widening doorways, adding a ramp, installing a zero-grade shower with rails, or changing doorknobs. The deduction is not available to homeowners who make the improvements to make the home more accessible to elderly family members, and there needs to be a documented medical reason for the upgrades.
Deduction of Rental Expenses
Homeowners who rent out a part of their homes like a casita or even an extra bedroom can deduct expenses related to the rentals. This can include maintenance, utilities, supplies, and real estate taxes.
Not to confuse you, but you may owe taxes on the income made from renting out part of your home. So, again, consult your tax accountant to ensure you are doing everything by the ebook to avoid getting audited.
One of the biggest benefits of homeownership is the payday you get once you sell the home.
As you may know, home values exploded this year, so if you sold your home, you should have made a lot of money.
As long as you a) owned the home for at least two out of the last five years, b) lived in the home for two of the last five years, and c) haven’t used the capital gains exclusion on a home sale in the last two years, that money you made is tax-free.
Increased Basis When Selling Your House
If you aren’t able to take advantage of the capital gains exclusion, you may be able to lower the taxes you owe on the money you made when you sold your home.
You can do this by adjusting the basis of your home so that the taxable amount is less.
The basis of your home is the amount you paid for it plus the money you spent to improve the property. You can also add the closing costs you paid when you bought the home, and you’ll subtract this amount from the sales price of the house to find how much will be taxed.
How Can I Take Advantage Of These Tax Breaks?
In order to take advantage of these tax breaks, you’ll need to file various forms depending on which tax break you are hoping to receive. These will be submitted when you file your taxes. You should also keep receipts of improvements you made throughout the year just in case your taxes get flagged.
Again, it is of utmost importance that you consult a tax accountant to make sure you are doing everything according to the tax law and also so that you don’t miss any deductions.