9 Tax Tips Every Homeowner Needs to Know

Posted by Key2See Team on February 23, 2021

9 Tax Tips Every Homeowner Needs to Know

There are many financial responsibilities associated with homeownership, some you see coming and those one cannot predict.  But the good news, for anyone who pays a mortgage, is that come tax time there are several deductions and/or tax breaks that can help lighten that load.

Seeing that tax season is upon us, use this list to make sure you are taking full advantage of the tax breaks and credits available to homeowners.  Because, as we all know, every little deduction helps this time of year!

1. Mortgage interest deduction

A portion of every mortgage payment you make goes toward interest on your home loan, but you can deduct that interest if you’re eligible and you itemize your deductions.

Start by looking at the date you took out the mortgage and how much you borrowed. If you closed before December 16, 2017, then interest is deductible on up to $1 million in mortgage debt (or up to $500,000 if you’re single or married filing separately). The limit drops to $750,000 ($375,000 for single and separate filers) if you bought the home December 17, 2017 or later.

2. Home equity loan interest deduction

If you took out a home equity loan or line of credit in 2020, you might be able to deduct the interest paid during the year. But you can only claim this tax break if you 1) itemize your deductions and 2) used the money to buy, build or substantially improve the home.

If you’re eligible, the interest is deductible on up to $750,000 of qualified residence loans ($375,000 for a married taxpayer filing separately), which include your original mortgage plus second mortgages such as home equity loans and home equity lines of credit.

3. Tax exclusion for home sale profits

To the surprise of many 2020 was a good year for home sellers. Home sales hit their highest level since 2006 and the median home price reached a new record. Even better, those who made a profit on a sale might not have to pay taxes on the earnings. If you lived in your home for at least two out of the five years before selling, then you can exclude up to $500,000 in profits on your income tax return (up to $250,000 if you’re single or filing separately).

4. Other home sale costs

If you do have to pay taxes on some of your home sale profits, expenses used for selling your home - like legal fees, advertising expenses, and real estate costs - can reduce how much is taxable. These costs are subtracted from your home’s sale price, which reduces your capital gains tax.

5. Mortgage insurance premiums

Homeowners can deduct money paid toward mortgage insurance, which is a type of coverage that protects the lender if the borrower falls behind on mortgage payments. You might be able to claim this tax deduction if the insurance contract was issued after 2006 and your adjusted gross income falls below $109,000 ($54,500 if you’re married filing separately).

6. Home office expenses

Renter or homeowner, your home office may be tax-deductible — as long as you’re self-employed. You don’t even have to itemize to claim this tax break.  However, if you work for someone else as an employee, you can’t claim your home office as a deduction. When self-employed make sure you are researching the other deductions that can help your bottom line.

7. Renewable energy additions & Energy efficiency improvements

You can also claim credits for green improvements you make to your home.  One credit called the Residential Renewable Energy Tax Credit is for installing qualifying solar, wind, geothermal and fuel-cell technology. The credit in 2020 is equal to 26% of the cost of the equipment, including installation. This can equate to substantial reductions on the front end and sustained savings for the life of the home.

The Nonbusiness Energy Property Tax Credit applies to certain energy-efficiency improvements you made to your home last year. The credit is worth either 10% of the cost of the improvement or what you paid for a purchase, up to $500.

Qualified improvements include:

  • Energy-efficient exterior windows, doors and skylights
  • Roofs (metal and asphalt) and roof products
  • Insulation

Qualified purchases include:

  • Energy-efficient heating and air-conditioning systems
  • Water heaters (natural gas, propane or oil)
  • Biomass stoves

You can also get credits up to $50 for any advanced main air-circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy-efficient building property.

8. Forgiveness of mortgage debt

If you had some portion of mortgage debt forgiven last year by your lender - either through a foreclosure, short sale, deed-in-lieu of foreclosure or loan modification—the forgiven amount is not considered taxable income on your federal taxes.

Typically, forgiven debt is taxable, but this exclusion of mortgage debt was extended for the 2020 tax year.

9. Casualty losses

You can also deduct losses from theft related to your home, household items and vehicles on your federal taxes as long as the loss was caused by a federally declared disaster declared by the president. Other qualifications include:

  • Losses covered by insurance aren’t eligible to be deducted.
  • Your total amount of losses also must exceed 10% of your adjusted gross income.
  • Losses were incurred during the tax year that you’re filing.