Your Painless Guide to Tax Deductions for Homeowners

Owning a home can be a great source of joy. You’ve worked hard to establish yourself and now you have a place to call your own. You get to decorate it however you want. And, no more worrying about loud neighbors above or below you. It’s your sanctuary where you can grow your family. 

Of course, a homeowner also faces responsibilities and expenses. The mortgage, taxes, and utilities need to be paid. Inevitable home repairs seem to pop up at the most inconvenient times. And, of course, those improvement projects to make your house feel more like a home can be costly.

That being said, a home is an investment that can pay off in the long run. But here’s something you may not know: the government actually encourages individuals and families to purchase homes. How? By offering tax benefits to homeowners.   

Things can get a little tricky as tax laws are often complicated and continue to change. Here’s what homeowners currently need to know about tax deductions.

Standard Deduction vs. Itemizing Expenses: Which Should a Homeowner Choose?

When filing taxes, you need to choose between the standard deduction or itemized deductions. You can’t do both. Homeowners need to determine if itemizing a tax return will be worth the time and effort.

When considering tax deductions for homeowners, you need to know many of these deductible expenses require you to itemize your taxes. This takes time, proof, and extra paperwork. And yes, it could save you more money based on your situation—especially when you qualify for other tax deductions. 

Is the extra work and paper trail worth it? Well, that all depends… 

Benefits of a Standard Deduction

The standard deduction is a flat-rate—no extra paperwork needed—reduction in your adjusted gross income. Standard deductions make filing your taxes simple and quick. 

In 2017, a tax reform law nearly doubled the current standard deduction. As a result, almost 90% of taxpayers opted for the standard deduction.

So, currently, how much can you deduct with no questions asked? 

For 2020, the standard deduction is:

• $12,400 if filing as single or married filing separately 
• $24,800 if filing as married filing jointly
• $18,650 if filing as head of household

For those 65 and older (or blind) the standard deduction increases by another $1,300 to $1,650 depending on how you’re filing. The extra deduction actually doubles if you are blind AND over 65.

For 2021, there are modest increases for all types of standard deductions.

When Should You Consider Itemizing Your Deductions?

If the amount of deductions for homeownership and other qualifying expenses is more than the standard deduction, you should consider itemizing. 

The IRS has hundreds of available tax deductions. And yes, it’s a little complicated. But some of the common itemized deductions can include:

• Home mortgage interest (more on this next)
• Charitable donations
• Student loan interest paid
• Qualifying medical or dental expenses
• Earned income tax credit
• State and local taxes  

Believe that you’re eligible for a few of these deductions? Then itemizing your tax return may be right for you.

What are the Tax Deductions for Homeowners?

Ready to discover how owning a home can save you money when tax time comes around? Then let’s get started.

Home Mortgage Interest

As mentioned earlier, home mortgage interest (for a primary residence) can be a big tax deduction. As we’re settling into our homes in the first few years, much of our mortgage payments go toward interest rather than principle. 

Again, this requires you to itemize your federal income tax returns. It may be worth it. The tax deduction is eligible on mortgages up to $750,000.

What About Home Equity Loans?

After you own a home, you may choose to take out a home equity loan. Home equity loans are used for a variety of reasons including home improvements, debt consolidation, offsetting college costs, and paying for emergency expenses.

Current tax laws say that you can deduct the interest of a home equity loan if:

• The loan helps you buy or improve your first or second residence
• The combined balance of your first mortgage and home equity loan is not more than $750,000

Expenses Related to Closing Costs

If you purchased a home this year, you probably noticed quite a few extra expenses bundled into the closing costs. This usually includes fees to check the title, process the sale, perform a property appraisal, and draft a contract. And those costs certainly add up! Are they tax deductible? Unfortunately, many are not. 

But there is one closing cost that is usually tax-deductible.

Discount points paid when you set up your mortgage are also usually tax-deductible. Discount points are a form of pre-paid interest that helps lower the interest rate of your loan. For example, for a mortgage of $300,000, one may pay an extra $3,000 to reduce the overall interest rate by a quarter of a percentage point. This upfront cost can save you thousands over the course of the loan—and it is tax-deductible.

Don’t confuse discount points with loan origination points. Loan origination points are sometimes lumped in with closing costs. These are not tax-deductible. (Bummer, we know…)

One other thing to consider: private mortgage insurance premiums (PMI)s—usually associated with mortgages with less than 20% down—may be deductible. To find out more, consult with a certified public accountant whom you trust.

State and Local Property Taxes

You can deduct up to $10,000 of state and local property/income taxes. This amount has been reduced thanks to 2018’s Tax Cuts and Jobs Act and will probably carry on until 2025. There is, however, a chance newly elected politicians will amend current tax laws. 

Please remember: real estate taxes are deductible the year they are paid. As you probably know, this year’s real estate taxes typically pay for last year’s bill. Also, if your real estate tax money is tied into an escrow account via your mortgage, the money is deductible when it is actually sent to pay property taxes.  

And, by now, you’ve probably guessed, you can only deduct these expenses when you itemize your taxes.

Capital Gains from Selling Your Home

If you sell your home for a profit, a single individual may be able to exclude up to $250,000 of that gain from the income—$500,0000 if you file a joint return with your spouse. To be eligible for this tax deduction, you need to have lived in that home for at least two of the last five years before the sale took place. 

Improving Your Home Office

Working from home has become the new norm for many this year. If you have a dedicated workplace set aside in your home—not an area that others also use—improvements or repairs may be tax-deductible business expenses. Just make sure you’re following the IRS’s guidelines for a home office to ensure you’re making the proper deductions. 

Are Home Repairs Tax Deductible?

Unfortunately, most home repairs and improvements (unless they are lumped in with a home equity loan or mortgage) are non-tax-deductible. 

There are a few tricks, however, that offset the costs of some repairs and improvements. 

For example, if you have a qualified home office and you need a major repair—like a new furnace or water heater—a portion of that repair can be written off as a business expense. For example, if your home office takes up 10 percent of your home’s square footage, then you can deduct 10% of the repair’s cost. 

You may also receive a one-time tax credit (different than a deduction) for installing energy-efficient systems in your home like solar, wind, geothermal, or fuel cell technology. If these systems were installed in 2020 you can obtain a 26% credit. The percentage drops to 22% in 2021. 

Want Some More Ideas on How to Make Your Home Work for You? 

Navigating tax codes takes a lot of time. And, just when you think you understand everything, the codes change. 

Ready to discover if it’s worth itemizing your tax return to take advantage of tax deductions for homeowners? 

The team at Steven Lissner & Company has over three decades of experience in enabling homeowners to find qualifying deductions that save them money. We’ll look beyond those convenient tax preparation applications and help you maximize your deductions. 

Getting started is easy. Simply request a free consultation today. Or, if you prefer, give us a call at (973) 917-4080 today!