(This article includes a compilation of leading sources and information, cited below)
It’s 2018. The holiday season is over and now it is time to get back to “adulting”. With that comes the dread of TAX season. I know, I know, the tax bill that has been signed by President Trump has completely overhauled the tax system, keeping many of us in a lurch on how it might impact the “common” American when it comes to home ownership. Yes, there are a lot of changes that will effect deductions and tax breaks in the future…but we will get to that down the road. For now, lets focus on how you can still make home ownership from 2017 work for you NOW and save you money during this tax season. My colleagues at Colorado Home Realty even argue that the new tax bill won’t impact homeowners much moving forward, but again, for now, lets simply focus on your 2017 taxes. Ready? Okay, lets go…
So, What Are Home Tax Expenses or Home Ownership Tax Deductions?
Home ownership used to be called “the American dream.” But recent statistics show the old notion of a white picket fence and a tree swing may not be the reality anymore for many Americans, with U.S. home ownership rates recently hitting its lowest level since 1965 (my friends in Colorado probably feel the exact opposite reading this…HA!).
There are a host of reasons for that, including the fact that potential buyers feel they can’t afford real estate in many markets (especially here in DENVER!). But when you add up the costs and benefits of home ownership, it’s important to remember that owning a property can unlock some of the biggest potential tax breaks most families have access to.
Homeowners can claim a slew of write-offs to lower their tax bills. There are deductions for mortgage interest, mortgage points and real-estate tax payments. And when you sell your home, you most likely won’t have to pay taxes on the profit. If you bought a home last year in 2017, you might even get to write off expenses you didn’t pay. Lets dive into what those deductions might be a bit further.
What Tax Deductions Can I Claim Related to the Common Costs of Purchasing a Home?
Most deductions related to real estate must be itemized on Schedule A (Form 1040) of your tax forms. For those familiar with paying taxes, that means foregoing the standard deduction for your filing status—it’s an either/or situation. You can either itemize or you can or you can claim the standard deduction but you can’t do both. Schedule A also covers many other deductible expenses, as well, including medical expenses, and charitable contributions. Sometimes all these, along with your real estate related deductions, add up to more than the standard deduction for your filing status, making it worth the time and effort to itemize your deductions. Otherwise, you’ll save more tax dollars by skipping the real estate related deductions and claiming the standard deduction instead.
Now let me preface this by saying that I am not a tax professional or expert AT ALL. However, it’s usually advisable to complete Schedule A and compare the total of your itemized deductions to your standard deduction to find out which method is most advantageous for you. As of 2017, the standard deduction is $6,350 for single taxpayers and married taxpayers who file separate returns. It’s $12,700 for married taxpayers who file jointly and $9,350 for those who qualify as head of household. Of course, this will change for next year. But for now, should you choose to itemize your deductions, you may claim the following expenses on your tax return from 2017:
Home Mortgage Interest Payments (usually reported on Form 1098)
Mortgage interest currently includes that which you pay on loans to buy a home, on home equity lines of credit, and on construction loans. The deduction is limited to interest you paid on your main home and/or a second home. Note to you investors reading this, interest paid on third or fourth homes isn’t deductible. You must also be legally on the hook for the loan—the debt can’t be in someone else’s name unless it’s your spouse and you’re filing a joint return. It must be a bona fide loan in that you have a contractual obligation to pay it back. Finally, your home must act as security for the loan and your mortgage documents must clearly state this.
Your home can be a single family dwelling, a condo, a mobile home, a cooperative, or even a boat—pretty much any property that has “sleeping, cooking and toilet facilities,” according to the Internal Revenue Service.
Real Estate Property Taxes
Real estate taxes are deductible if: 1) you own the property, 2) it’s for your personal use, and 3) you also itemize your deductions (as discussed above). Deductible property (real estate) taxes include taxes paid at closing when buying or selling a home, as well as taxes paid to your county or town’s tax assessor (either directly or through a mortgage escrow account) on the assessed value of your property.
Mortgage Points on Your Loan
(each point is equal to one percentage of the loan amount)
The points you paid when you signed a mortgage to buy your home may help cut your federal tax bill. With points, sometimes called loan origination points or discount points, you make an upfront payment to get a particular interest rate from the lender. Since mortgage interest is deductible, your points may be, too.
The IRS rules for deducting purchase mortgage points are straightforward, but lengthy. You must meet each of these seven tests to deduct the points in the year you pay them:
1. Your mortgage must be used to buy or build your primary residence, and the loan must be secured by that residence. Your primary home is the one you live in most of the time. As long as it has cooking equipment, a toilet, and you can sleep in it, your main residence can be a house, a trailer, or even a boat. Points paid on a second home have to be deducted over the life of your loan.
2. Paying points must be a customary business practice in your area. And the amount can’t exceed the percentage normally charged. If most people in your area pay one or two points, you can’t pay 10 points and then deduct them.
3. Your points have to be legitimate. You can’t have your lender label other things on your settlement statement, like appraisal fees, inspection fees, title fees, attorney fees, service fees, or property taxes as “points” and deduct them.
4. You have to use the cash method of accounting. That’s when you report your income to the IRS as it comes in and report your expenses when you pay them. Almost everybody uses this method for tax accounting.
5. You must pay the points directly. That is, you can’t have borrowed the funds from your lender to pay them. Any points paid by the seller are treated as being paid directly by you.
In addition, monies you pay, such as a downpayment or earnest money deposit, are considered monies out of your pocket that cover the points so long as they’re equal to or more than points. Perhaps an example would suffice here. Say you put $10,000 down and pay $1,000 in points to get that lower interest rate you covet so much. In this example, the downpayment exceeds the points, so your points are covered and therefore you can deduct them if you itemize. If you were to put nothing down but you paid one point, that $1,000 wouldn’t be deductible.
6. Your points have to be calculated as a percentage of your mortgage. One point is 1% of your mortgage amount, so one point on a $100,000 mortgage is $1,000.
7. The points have to show up on your settlement disclosure statement as “points.” They might be listed as loan origination points or discount points.
Lender Tip: You can also fully deduct points you pay (for the year paid) on a loan to improve your main home if you meet tests one through five above.
Okay, So What Are Home Related Expenses That You CANNOT Deduct?
The following expenses cannot be claimed as tax deductions:
What Types of Home Improvements Can Be Claimed as Tax Deductions?
Some types of home improvements can potentially lower your tax obligation when you sell your home. Such expenses may include replacing a roof or adding an extension, which increases the usefulness and value of your home. These types of expenses/deductions cannot be used until you sell your home. However, all records should be kept for future use, since any home improvement costs can add up over the years. Be mindful that any normal repair or maintenance on your home is not tax deductible.
What Are Additional Deductible Home Expenses and House Tax Deductions?For your 2017 taxes, you may also claim tax deductions for the following expenses:
Chad, This is All About As Clear As Mud: Where Can I Find More Information on Tax Deductible Home Expenses?
Well that about covers it from my end, and the extent of my tax knowledge around real estate and ownership. If I haven’t bored you to death, I hope that this provides you current (and particularly first time) homeowners with some guidance this tax season. For those currently in the market, you will have the luxury of benefiting from home ownership next year (albeit, it may look and feel differently). Additional information about home related tax deductions may be found in *YAWN* IRS Publication 530-Tax Information for Homeowners. Or, feel free to contact a local real estate professional (such as me) or tax professional (NOT ME) with any additional questions that you might have!
Thanks for reading! PLEASE share with your networks, and PLEASE think of me when it comes to your real estate matters and guidance
Chad J. Nash, Ph.D.
“The Real Estate Doctor”
1. USA Today. Five Big Tax Breaks for Homeowners. Feb. 21, 2017.
2. The Balance. Mortgage Interest Deductions. December 8, 2017.
3. Internal Revenue Service. Itemizing vs. Standard Deduction: Six Facts to Help You Choose. Accessed: January, 2, 2018.
4. Efile.com. How to Claim and Report Tax Deductible Home Expenses. Accessed: January 3, 2018
5. Colorado Home Realty. Proposed Tax Reforms Not Harmful for Real Estate. November 25, 2017.
6. Jeff Farmers (Mortgage Loan Officer), American Lending.