Tax deductions for homeowners are indeed hidden values for owners of properties. The tax laws surrounding homeownership provide many tax deductions that ultimately save tax for you. This post brings to you ten such tax deductions provided for homeowners under the various provisions of the Internal Revenue Code.
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Video: Ten Tax Deductions for Homeowners
1. Deductions for State & Municipal tax on real estate.
The property tax imposed by the State or local bodies is a recurring cost for owning the properties. The good news is that the property tax you paid to the State or Local odes is tax deductible. Section 164(a) of the Internal Revenue Code provides that the State and municipal real property taxes paid on your personal residence, holiday home, and leased property during the taxable year are deductible while computing the total income.
However, one should note that the maximum tax deduction for any State or Municipal Taxes on the property is restricted to $10,000 ($5,000 in the case of a married individual filing a separate return ).
Another thing that must be noted is that taxes such as assessments for sidewalks, water mains, sewer lines, parking lots, and similar improvements are not deductible even though local authorities charge them.
2. Deductions on mortgage interest.
The mortgage interest deduction is a sizable additional tax break given to homeowners. According to section 163 of the IRS, you can deduct eligible residential interest paid on your principal dwelling and a second home throughout the tax year. The condition is that the mortgage amount must be used to purchase, construct, or improve the home, and the interest must be paid on that mortgage.
For the year 2023, the maximum deduction amount of interest can be the interest paid on mortgages amounting up to $750,000 only.
3. Tax deductions for home offices.
The concept of home office deduction is simple. If you use a portion of your house for work i.e. earning from self-employment or business, you can claim expenses incurred on that portion of your house, a tax deduction for a home office.
All kinds of expenses that you incurred for using your house for commercial purposes, including mortgage interest, real estate taxes, utilities, maintenance, and depreciation on the home office portion can be claimed as deductions. There are two ways to figure out the home office deduction:
- The conventional way is to determine the actual costs related to the home office.
- The simplified methods under which the area used for conducting business may be written off using the simplified approach at a rate of $5 per square foot, up to 300 square feet.
We have already published an article home office deductions calculator.
4. Tax credits for energy-efficient homes.
To promote the concept of “Green Energy”, many tax credits and deductions are now allowed both at the Federal and state levels for making your house energy-efficient. For example, installing solar panels or a new energy-efficient heating and conditioning system will provide you with a handsome amount of tax credits that are not refundable but can be carried forward for many years. Therefore, those tax credits lower your tax outgo for many years,
At the Federal level, now you can claim up to maximum tax credit of $3,200 annually for making your home energy efficient beginning 1st January 2023. Test the federal Home Energy Credit Calculator. Similarly, various States also provide incentives through tax credits like California Solar Incentives.
5. Deductions for rental property taxes.
As a homeowner, it may just be the case that you have used the house for earning rental income. In that case, you can claim certain kinds of expenses that are otherwise not available to owners of a personal residence. This is so because these come under the business expense incurred for carrying on a business or profession out of your home.
The depreciation expense is one such expenditure apart from costs associated with upkeep and repairs. Apart from that, you may also deduct expenses on marketing, insurance, property taxes, and travel in accordance with governing law section 212 of IRC.
6. Tax deductions for home improvements.
When you use your home for business, it may just be the case that your home requires some change to make it suitable for your business or profession. You may be able to deduct the cost of home improvements from your taxes. Yes, not all home modifications qualify for a tax deduction.
Only home modifications that boost your home’s value or extend its useful life are eligible for tax deductions, according to section 165(c) of the Internal Revenue Code permits you to write off losses incurred as a result of property damage, including damage brought on by an unanticipated event like a natural disaster.
Losses incurred as a result of theft or embezzlement are also deductible. Additionally, you might be eligible to claim such costs as medical expenses under IRC Section 213 if you undertake home changes required to accommodate a disabled person.
7. Tax Deductions for Moving Costs.
You might be able to deduct your relocation costs from your taxes if you move for professional reasons. Your new workplace must be at least 50 miles away from your previous one for you to be eligible for this deduction.
You can write off the reasonable costs of moving yourself, your family, and your possessions from your old home to your new home in accordance with IRC 217. Included in this are costs for travel, housing, and storage. Nevertheless, there are some limitations to this deduction, so make sure to speak with a tax expert to find out if you’re eligible.
8. Tax deductions for second homes.
You might also be qualified for tax benefits if you own a second house. A secondary dwelling can enjoy the same benefits as a primary residence, such as property tax and mortgage interest deductions. The mortgage interest deduction for a second home is restricted to the interest paid on $750,000 (or $375,000 if married filing separately) of mortgage debt in accordance with Code 163(h)(4)(A).
The $10,000 annual cap applies to the property tax deduction for homeowners of second homes.
9. Deductions for real estate business expenses.
In case you employ your house or real estate properties for business purposes, such as a rental home or a holiday home, you can claim depreciation expense on the asset (real estate properties) and costs associated with upkeep and repairs are included in these deductions.
You may also write off expenses related to renting out real estates, such as marketing, upkeep, repairs, insurance, property taxes, and travel, following IRC 212. Depreciation on the asset is also deductible; it is determined based on its cost, useful life, and depreciation method.
10. Tax deductions for interest on home equity loans.
You might be eligible to deduct the interest on a home equity line of credit (HELOC)you took out to pay for home improvements from your federal income taxes. Nevertheless, this deduction has some limitations, so make sure to speak with a tax expert to find out if you’re eligible.
The mortgage interest deduction for a home equity loan is capped at the interest paid on $100,000 of mortgage debt in accordance with Code 163(h)(3)(F). Your home must also serve as collateral for the loan.
Tax advantages related to property ownership might be significant. Taking advantage of the tax breaks available to you as a homeowner can reduce your tax liability and increase the return on your home investment.
You can make the most of your investment in your house and take advantage of the many advantages of homeownership by taking the time to understand the tax deductions for homeowners available to you as a homeowner and working with a tax professional to optimize your savings.
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