When you own your own home, you want to make sure you take every deduction possible to ensure that you maximize your tax refund. You might be wondering how items like home improvement, the mortgage interest you paid, taxable income, and itemized deductions will impact this year’s tax bill.
This can get complicated, but we’ve got you covered! Here are some of the most important tax deductions that homeowners can take advantage of.
1. Mortgage Interest
Here’s one of the main tax benefits of becoming a homeowner: After you buy a home, the interest that you’ve paid on your mortgage for the past year is tax-deductible (if it meets a few criteria).
If you signed up for a mortgage on December 16, 2017, or later, then you can deduct interest on up to $750,000 of mortgage debt. If you obtained a mortgage before that, then you can deduct interest on up to $1 million of mortgage debt.*
The difference between these dates has to do with the Tax Cuts and Jobs Act. Mortgages that existed before this act went into effect (on December 16, 2017) were grandfathered in under the previous rule. New mortgages had to abide by the revised rule.
Your loan servicer will send you a tax form (IRS Form 1098) well in advance of the tax filing deadline summarizing how much you paid toward your mortgage’s principal versus the interest portion of your mortgage payments.
Just as mortgage interest is tax-deductible, so are the discount points you paid to lower your interest rate. If you purchased points as a way of lowering your interest rate, you may be able to deduct these points come tax time.
Like mortgage interest, discount point deductions are limited for homes that cost more than $750,000. That limit goes up to $1 million for mortgages originated before December 16, 2017.
There are a few more rules on the tax benefits of mortgage points.
The points can’t be used to finance standalone fees, such as property taxes. And you must have had the funds to purchase the points—these funds can’t be a gift and can’t come from a loan. The amount you paid for points must be itemized as points on your statement.
You can deduct all your points at once during the tax year when you purchased your home, or you can write off a percentage of your points each year you have your mortgage.
Points that you purchased for refinancing a mortgage can also be tax-deductible, but only over the life of the loan, not all at once. Homeowners who refinance can write off the balance of the old points and begin to amortize the new points. Loan origination points are not deductible.*
3. Home Improvement Loan Interest
It used to be that if you took out a loan to do some major home improvements, you could deduct the interest paid on that loan. That tax break is no longer available, but many people still wrongly assume that this interest will be tax-deductible.
You can still get a tax benefit from two types of home improvement costs, however. These are home renovations that are considered medical expenses, as well as solar energy installations.
On the medical expenses front, tax-deductible expenses include items like wheelchair ramps, support bars for bathtubs or toilets, doorway modifications, stairway renovations, and warning systems. Essentially, any accessibility item that would make a home safe and inhabitable for someone with specific medical needs will qualify.
The money you pay to install solar energy systems isn’t tax free, but these systems can save you money on your tax bill and your electric bill. Tax deductions can include up to 26% of the cost of installing solar panels, solar water heaters, and all other forms of solar energy.*
4. Property Taxes
You can deduct up to $10,000 in property taxes paid each year ($5,000 if you’re married filing separately), which includes both state and local taxes.
If you have a mortgage with an escrow account, then the amount of real estate property taxes you paid will show up on your annual escrow statement.
This doesn’t include transfer taxes on the sale of your home, HOA assessments, payments on loans that finance energy-efficient home improvements, public assessments, or property taxes you have yet to pay.*
5. Home Equity Loan/HELOC Interest
You now know that you can’t deduct most home improvements—minus solar and medical necessities. But what you may not know is that you can deduct home equity loan and/or HELOC interest if you used home equity proceeds for renovations.
The renovations must be made on the same home where you tapped the equity. For example, you can’t take out a home equity loan on your primary residence to renovate your vacation home and claim that as a deduction.
You also can’t take out a home equity loan to simply create an emergency fund (or to use in any other way except improving that very home) and expect to claim that as a deduction.
Taxes, like loan applications, require diligent recordkeeping and often a heap of paperwork. Thankfully, owning your own home can provide some major relief on the tax front, though you want to be sure to review the most recent rules surrounding tax deductions before you file.
As the Tax Cuts and Jobs Act proves, certain laws and deductions do change over time. Be sure you know about all the tax deductions you have coming your way, while steering clear of old rules that could get you in trouble with the Internal Revenue Service.*
APM loan officers are not tax professionals, but they do have access to information about what is typically considered an allowable tax deduction as it relates to homeownership. It’s important to talk to your tax professional for specific information for your own unique financial scenario to see if there are tax deductions that you may not qualify for—or others that you may.
*The information provided has been prepared for informational purposes only and is not intended to provide—and should not be relied on for—tax, legal, or accounting advice. You should consult your own tax, legal, and accounting professionals for information specific to you.