Homeowners Receive Big Tax BreaksHome ownership can provide you with important tax benefits: Deductions for real estate taxes and home mortgage interest, and Gain exclusion if you meet certain occupancy and holding period requirements. If you install a solar electric system on your residence before 2022, you can qualify for a substantial tax credit. In fact, tax breaks are probably one of the biggest reasons you decided to buy your home in the first place. Unfortunately, some homeowners lose getting the most from their home’s tax advantages because they aren’t aware that certain limits apply. The purpose of this brochure is to highlight how you as a homeowner can best keep your home’s favorable tax edge. Your Home's Basis The amount of the gain exclusion permitted under current tax law tends to make most taxpayers forget about keeping track of their home improvements. Although inflation has been low in recent years, it could eventually take its toll, and the exclusion limits may not be as significant as they are today, or the law may change again. In either case, it may be appropriate to keep a record of the improvements on your home. Once you buy a home, you need to begin keeping records related to your home’s “basis,” i.e., the amount you have spent on the property. If you acquired your home through purchase, your basis is what you paid for it originally, including purchase expenses, PLUS improvement costs you incur while you own it. Keeping track of basis is extremely important in order to accurately compute gain or loss if you decide to sell. For the purpose of computing basis, it’s important to distinguish between “improvements” and repairs; only improvement costs add to your basis. Minor repairs like replacing faucet washers, painting a bedroom or patching a hole in the roof don’t need to be tracked. In general, improvements are of a more permanent nature than repairs. They enhance the value of your home and are likely to last more than one year. If you make the same improvement more than once, only the most recent improvement adds to your basis. You should log costs of items like the following in a home improvement record (be sure you keep your backup receipts and canceled checks): Room additions Landscaping New driveway Walkways Fence Retaining wall Sprinkler system Swimming pool Exterior lighting Satellite dish Intercom Security system Storm windows/doors Roof Central vacuum Heating system Central air Furnace Filtration system Light fixtures Wiring upgrade Water heater Soft water system Insulation Built-in appliances Kitchen upgrade Bathroom upgrade Flooring Wall-to-wall carpet Solar System Whenever there’s doubt about whether an expenditure qualifies as an improvement, make a note of it in your record anyway.That way, the ultimate decision about qualification can be made later when (and if) you decide to sell. The cost of items eligible for energy-saving credits must be reduced by the amount of the credit that was claimed when figuring your basis. Deductions Related to Your Home Certainly not all costs related to your home are deductible. For example, unless you use your home for business (e.g., you have an office in your home), costs for insurance, repairs, utilities, condo or homeowner association fees, etc., aren’t deductible. However, you generally will be able to deduct: Real Estate Taxes Home Mortgage Interest Keep in mind, however, that home mortgage interest deductions can be limited. The following rules are in effect from 2018 through 2025.Home acquisition mortgages obtained before 12/16/2017 Generally, you can deduct the interest from home acquisition debt (mortgages) of up to $1 million dollars on a combination of your first and second homes, provided they were the original loans. As the principal on these loans is paid down, the reduced loan amount becomes the new limitation, not to exceed $1 million. If you later refinance the home for more than the remaining balance on the original loan, the excess would have to be used for home improvements to qualify as home acquisition debt interest. If not, a portion of the interest would be equity debt interest. Home acquisition mortgages obtained after 12/15/2017 As a result of the tax reform legislation passed in 2017, the deductible interest is limited to the interest on the first $750,000 of debt on a combination of your first and second homes, provided they were the original loans. If you later refinance the home for more than the remaining balance on the original loan, not to exceed $750,000, the excess would have to be used for home improvements to qualify as home acquisition debt interest. If not, a portion of the interest would be equity debt interest. Home Equity Interest Prior to 2018 homeowners were also allowed to deduct the interest on the first $100,000 of debt secured by the home that exceeded the $1 million acquisition debt limit. The 2017 tax reform legislation suspended (temporarily repealed) the interest deduction for home equity debt. Loan Points: A question often comes up about the deduction for points on a home loan. Points are another name for prepaid interest – they may be called loan origination fees or some similar term. One point equals 1% of the loan amount. When points are paid for services a lender provides to set up a loan, the points aren’t deductible. However, when the points are paid as a charge for the use of money, the following rules apply: As a general rule, points are only deductible over the life of a loan. Say, for example, you paid $3,000 in points on a 30-year refinance loan. Your tax deduction would be limited to $100 a year ($3,000/30 years). If you decided to pay your loan off early, say after 15 years, you could write off the balance of the points ($1,500) in that year. An exception to the general rules lets you deduct, in full, points you pay in connection with obtaining a mortgage to purchase, construct, or improve your main home. Seller-paid points can even be deducted by a home buyer, but the amount deducted reduces the home’s basis.