It’s tax season again, but being a homeowner might just make it rain at refund time.  Check out the tax-deductible expenses, exemptions, and credits below.  Whether you own a house, condo, or mobile home, they can save you big money when you file.  Just be sure to compare your total itemized deductions against the standard deduction and see which is higher (you’ll have to choose between standard OR itemized on your return).  It’s also good to know what you can’t deduct before you land in hot water with the IRS…

Mortgage Interest

A house payment is comprised of two parts: principal and interest. The principal goes toward reducing the amount you owe on your loan and is not deductible. However, the interest you pay is deductible as an itemized expense on your tax return. You can generally deduct interest on the first $750,000 of your mortgage (or $375,000 each if you’re married filing separately) if you purchased your home after December 15th 2017. Those who purchased earlier (10/14/1987 – 12/15/2017) can deduct interest paid on up to a $1m mortgage.

Property Taxes

You can deduct up to $10,000 of property taxes you paid (or $5,000 if you’re married filing separately). If you have a mortgage, the amount you paid in taxes will be included on the same annual lender statement that shows your loan interest information.  If you paid the property taxes yourself but don’t have receipts, you should be able to locate the total tax amount on your county assessor’s website.

Home Improvements

Making improvements on a home can help you reduce your taxes in a few possible ways:

• If using a home equity loan or other loan secured by a home to finance home improvements, these loans will qualify for the same mortgage interest deductions as the main mortgage. Only the interest associated with the first $100,000 is deductible (and if you’ve already maxed out the interest deduction on your main mortgage, you won’t be eligible for any additional deduction for this loan).

• Tracking home improvements can help when the time comes to sell. If a home sells for more than it was purchased for, that extra money is considered taxable income. However, you are allowed to add capital improvements to the cost/tax basis of your home thereby reducing the amount of taxable income from the sale. Keep in mind that most taxpayers are exempted from paying taxes on the first $250,000 (for single filers) and $500,000 (for joint filers) of gains.

• Home improvements made to accommodate a person with a disability (yourself, your spouse, or your dependents who live with you) may be deductible as medical expenses. Examples include adding ramps, widening doorways/hallways, installing handrails or grab bars, lowering kitchen cabinets, or other modifications to provide wheelchair access.

• If you live in Washington State and apply with your county prior to construction, you may be able to get a 3-year property tax exemption for major home improvements (including an ADU or DADU) that add up to 30% of the original home’s value.

Home Office Deduction

If you run a business out of your home, you can take a deduction for the room or space used exclusively for work as your principal place of business. This includes working from a garage, as well as a typical office space. Unlike most of the other deductible expenses, you can deduct home office expenses even if you opt to take the standard deduction.

This deduction can include expenses like mortgage interest, insurance, utilities, and repairs, and is calculated based on “the percentage of your home devoted to business use,” according to the IRS.

Home Energy Tax Credits

For homeowners looking to make their primary home a little greener, either the Energy Efficient Home Improvement Credit or the Residential Energy Clean Property Credit can help offset the cost of energy efficiency improvements. Even better, these are credits, which means they directly lower your tax bill.

• Energy Efficient Home Improvement Credit: 30% of the cost for qualified high-efficiency doors, window, insulation, air conditioners, water heaters, furnaces, heat pumps, etc. Maximum credit of $1,200 (heat pumps, biomass stoves and boilers have separate max of $2,000).

• Residential Clean Energy Credit: 30% of the cost for adding qualified solar/wind/geothermal power generation, solar water heaters, fuel cells, and battery storage.

What You Can’t Deduct:

• Mortgage Insurance (this is a change as of 2022)
• Title Insurance
• Closing Costs
• Loan Origination Points
• Down Payment
• Lost Earnest Money
• Homeowner’s Dues*
• Homeowner’s/Fire Insurance*
• Utilities*
• Depreciation*
• Domestic staff or services*

*Unless it’s related to your home-office deduction—contact your tax pro to see if it’s a qualified deduction for you.

Do you have a low-income, disabled or senior homeowner in your life? Check out this article on King County property tax relief.

Psst…every homeowner’s financial situation is different, so please consult with a tax professional regarding your individual tax liability.

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© Copyright 2024, Windermere Real Estate/Mercer Island.
Adapted from an article that originally appeared on the Windermere Blog, written by: Chad Basinger.