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Details can be tricky. Double-check yourself with these tax rules affecting homeowners.
Like most homeowners over the past couple of years, you may have discovered that you can no longer write off your property taxes or claim the mortgage interest deduction.
That doesn’t necessarily mean your taxes went up. The change is because the standard deduction nearly doubled starting in 2018, negating many homeowners’ need to itemize their home-related expenses. Here's a roundup of the rules affecting homeowners.
Related: Are Closing Costs Tax Deductible?
The standard deduction is the amount everyone gets to claim whether they have actual deductions or not. It skyrocketed after the 2017 tax law changes, and has gone up again due to inflation adjustments for tax year 2022. It's now $25,900 for married, joint-filing couples (up from $25,100 in tax year 2021). It's $19,400 for heads of household (up from $18,800). And $12,950 for singles (up from $12,550).
Many more people now find the standard deduction is higher than their itemizable write-offs. In fact, the proportion of filers who now find it advantageous to itemize their deductions (including mortgage interest and property taxes) under the new rules has fallen from about one in three to around one in 10.
"This doesn't necessarily mean that those who no longer itemize will pay more taxes," says Evan Liddiard, a CPA and director of federal tax policy for the National Association of REALTORS® in Washington, D.C. "It just means that they'll no longer get a tax incentive for buying or owning a home."
So are you still itemizing, or are you now in standard deduction land? If the answer is standard deduction, you'll find that your tax forms are slightly simpler when you don't itemize, says Liddiard. But the trade-off is that our tax system no longer gives most homeowners a tax advantage over those who rent. Find instructions for IRS Form 1040 here.
The tax law caps the mortgage interest you can write off at loan amounts of no more than $750,000. However, if your loan was in place by Dec. 15, 2017, the loan is grandfathered, and the old $1 million maximum amount still applies. Since most people don't have a mortgage larger than $750,000, they won't be affected by the limit.
But if you live in a pricey place (like San Francisco, where the median housing price is well over a million bucks), or you just have a seriously expensive house, federal tax laws may mean you're not going to be able to write off interest paid on debt over the $750,000 cap.
The state and local taxes (SALT in CPA lingo) you pay — including income (or sales in states without a state income tax), and property taxes — are itemizable write-offs. But, the tax rules say you can't deduct more than $10,000 for all your state and local taxes combined, whether you're single or married. (It's $5,000 per person if you're married but filing separately.)
The SALT cap is bad news for people in areas with high taxes. The majority of homeowners in around 20 states have been writing off more than $10,000 in SALT each year, so many will lose some of this deduction. "This is going to hurt people in high-tax areas like New York and California," says Lisa Greene-Lewis, CPA and expert for TurboTax in California. Typical New Yorkers, for example, were taking SALT deductions around $22,000 a household.
If you're a landlord, there are no limits on the amount of mortgage debt interest or state and local taxes you can write off for rental property. And you can write off operating expenses, like insurance, lawn care, and utilities on Schedule E.
You can still write off the interest on a home equity or second mortgage loan (if you itemize). But you may do so only if you used the proceeds to substantially better your home and only if the total, combined with your first mortgage and any mortgages on a second home, doesn't go over the $750,000 cap ($1 million for loans in existence by Dec. 15, 2017). If you used the equity loan to pay medical expenses, take a vacation, or anything other than major home improvements, that interest isn’t tax deductible.
Here's a big FYI: If you took out an equity loan before the 2017 tax changes and used it to, say, pay your child's college tuition, you can no longer write off that interest.
Two deductions that have come and gone a number of times have been enacted yet again.
If you sold your primary residence short and had part of your mortgage debt forgiven by the lender, you don’t have to pay tax on the amount of debt discharged, at least through the end of 2025.
Also back through tax year 2021 is the deduction for private mortgage insurance. Keep in mind, however, that it’s only relevant to itemizers making not more than $109,000 per year.
If the mortgage interest and other deductions elude you, these strategies might help reduce your tax obligation.
1. Single people may get more tax benefits from buying a house, Liddiard says. "They can often exceed the standard deduction more quickly than can married couples. This is because a house for one is not half the price of a house for two." You can check how much you're likely to owe or get back under the new law on this tax calculator.
2. Student loan debt is deductible, up to $2,500 if you're repaying, whether you itemize or not. However, there are income limitations for this deduction.
3. Charitable deductions and some medical expenses are itemizable. If you're generous or have had a big year for medical bills, these, added to your mortgage interest and state and local taxes, may be enough to bump you over the standard deduction hump and into the write-off zone. Keep in mind, however, that medical expenses are deductible only the the extent that they exceed 7.5% of your adjusted gross income.
4. If your mortgage is over the $750,000 cap, pay it down faster so you don't eat the nondeductible interest. You can add a little to the principal each month, or make a 13th payment each year.
Here’s the scoop on what’s tax deductible when buying a house.
The answer to whether closing costs are tax deductible -- or mortgage interest and property taxes for that matter -- is often maddeningly, “It depends."
Basically, you'll want to itemize if you have deductions totaling more than the standard deduction, which for 2022 is $12,950 for single people and $25,900 for married couples filing jointly. Practically every taxpayer gets this deduction, homeowner or not. And most people take it because their actual itemized deductions are less than the standard amount.
But will you have enough deductions to itemize?
To see, you need to know what's tax deductible when buying or owning a house. Here's the list of possible deductions:
The one-time home purchase costs that are tax deductible as closing costs are real estate taxes charged to you when you closed, mortgage interest paid when you settled, and some loan origination fees (a.k.a. points) applicable to a mortgage of $750,000 or less.
But you'll only be able to benefit from them if all your deductions total more than the standard deduction.
Costs of closing on a home that aren't tax deductible include:
Mortgage interest and property taxes are annual expenses of owning a home that may or may not be deductible. Continue reading to learn more about those.
Yearly, you can write off the interest you pay on up to $750,000 of mortgage debt. Most homeowners don't have mortgages large enough to hit the cap, says Evan Liddiard, CPA, director of federal tax policy for the NATIONAL ASSOCIATION OF REALTORS®. But people who live in pricey places like San Francisco and Manhattan, or homeowners anywhere with hefty mortgages, will likely reach the maximum mortgage interest deduction.
Note: The $750,000 cap affects loans taken out after Dec. 15, 2017. If you have a loan older than that and you itemize, you can keep deducting your mortgage interest on debt up to $1 million. But if you refi that loan, you can only deduct the interest on the amount up to the balance on the day you refinanced – you can't take extra cash and deduct the interest on the excess.
You can deduct the interest on a home equity loan or a second mortgage. But — and this is a big but — only if you use the proceeds to substantially improve your house, and only if the loan, combined with your first mortgage, doesn't add up to more than the magic number of $750,000 (or $1 million if the loans were existing as of Dec. 15, 2017).
If you use a home equity loan to pay medical bills, go to Paris, or for anything but home improvement, you can't deduct the interest.
You can deduct state and local taxes you paid, including property and income taxes (or sales taxes in states where there is no income tax), up to $10,000. That's a low cap for people who live in places where state and local taxes are high, says Liddiard. To give you an idea of how low: The average amount New Yorkers have taken in state and local tax deductions in past years is about $22,000.
You can write off the cost of damage to your home if it's caused by an event in a federally declared disaster zone, like areas in Florida after Hurricane Michael or Shasta County, Calif., after a rash of wildfires.
This means standard-variety disasters like a busted water pipe while you're on vacation or a fire caused because you left the toaster on aren't deductible.
This deduction is also only for some. You can deduct moving expenses if you're an active member of the armed forces moving to a new station.
And by the way, unless you are active military, if your employer pays your moving expenses, you'll have to pay taxes on the reimbursement. "This will be a real hardship to many because it’s noncash income," says Liddiard. Some employers may gross up the reimbursement amount to provide cash to pay the tax, but many likely will not.
This is a deduction you don't have to itemize. You can take it on top of the standard deduction, but only if you're self-employed. If you are an employee and are working from home during the pandemic, you can no longer write off home office expenses. You claim the deduction on Schedule C.
Related: 2 Ways to Claim Home Office Expenses
Anyone paying a mortgage and a student loan payment will be happy to hear that the interest on your education loan is tax deductible on top of the standard deduction (no need to itemize). And you can deduct as much as $2,500 in interest per year, depending on your modified adjusted gross income.
There are some other costs that can be itemized not related to being a homeowner that could bump you up over the standard deduction. This might allow you to write off your mortgage interest. Charitable contributions and some medical expenses can be itemized, although only that portion of your medical expenses that exceed 7.5% of your adjusted gross income can be deducted.
So if you've had a hospital stay or are generous, you could be in itemized-deduction land.
Also, if you're a single homeowner, it could be easier for you to exceed the standard deduction, Liddiard says. The itemized deductions on your house will probably more quickly break the 2022 $12,950 standard deduction threshold than a couple's similar house will break their $25,900 threshold.
If you're a prospective homeowner with an eye to making the most efficient use of your tax benefits, here are a few ways to buy smart:
To see whether you have enough deductions to itemize, get some guidance from TurboTax.
Though every homeowner's tax benefits will be a little different, in the end, you're building equity, you'll likely make money when you sell, and you have the freedom to paint your walls any color you want and get a dog.
Related: Tax Deductions for Homeowners
Don’t rouse the IRS or pay more taxes than necessary — know the score to avoid common tax mistakes.
As you prepare your tax returns for 2022, be careful not to make any of these eight common tax mistakes, especially when it comes to the property tax deduction or the mortgage interest deduction.
Tax pros say these home-related tax mistakes can cost you money or draw the IRS to your doorstep.
Unless you are one of the relatively few taxpayers who are on the accrual instead of the cash basis, you take a tax deduction for property tax in the year you (or the holder of your escrow account) actually paid them. Some taxing authorities work a year behind. That is, you’re not billed this year's property taxes until next year. But that’s irrelevant to the feds.
Enter on your federal forms whatever amount you actually paid in that tax year, no matter what the date is on your tax bill. Dave Hampton, CPA, a tax manager with HG CPA, LLC, in Cincinnati, has seen homeowners confuse payments for different years and claim the incorrect amount.
Tip: Taking this deduction requires you to itemize.
Here's another property tax issue that results in common tax mistakes. If your lender escrows funds to pay your property taxes, don’t just deduct the amount escrowed. The regular amount you pay into your escrow account each month to cover property taxes is probably a little more or a little less than your actual property tax bill. Your lender will adjust the amount every year or so to realign the two.
For example, your tax bill might be $1,200, but your lender may have collected $1,100 or $1,300 in escrow over the year. Deduct only $1,200 or the actual amount of property taxes paid that is noted on the Form 1098 that your lender sends. If you don’t receive Form 1098, contact the agency that collects property tax to find out how much you paid.
In many cases, you can deduct in full the points you paid your lender to secure your mortgage for the year you bought your home, if you itemize. However, if you pay points in connection with a refinance, you must deduct the points over the life of your new loan.
For example, if you paid $2,000 in points to refinance into a 15-year mortgage, your tax deduction is $2,000 divided by 15 years, or $133 per year.
Related: How to Deduct Mortgage Points When You Buy a Home
There are two ways to calculate the home office deduction. One is more complicated, has to be partially recaptured if you turn a profit when you sell your home, and can pique the IRS’ interest in your return. But it also can give you a larger deduction than the simpler method.
If you don't care to claim actual costs, which you do under the more complicated method, you can use the simplified home office deduction. If you’re eligible, you can deduct $5 per square foot up to 300 feet of office space, or up to $1,500 per year.
Related: Is YOUR Home Office Eligible for a Deduction?
If you used the original homebuyer tax credit in 2008, you must repay 1/15th of the credit over 15 years.
If you used the tax credit in 2009 or 2010 and then within 36 months you sold your house or stopped using it as your primary residence, you also have to pay back the credit.
The IRS has a tool you can use to help figure out what you owe.
Common tax mistakes are often made by omission: not keeping records. If the IRS comes a-knockin’, don’t be scrambling to compile your records. File or scan and store home office and home improvement receipts and other home-related documents as you go.
If you sold your main home last year, don’t forget to report capital gains on any profit above the excluded amounts. You can typically exclude up to $250,000 of any profits from your income (or up to $500,000 if you’re married filing jointly).
So, if the cost basis for your home is $100,000 (what you paid for it plus any improvements) and you sold it for $400,000 (net of selling expenses), your capital gain is $300,000. If you’re single, you owe taxes on $50,000 of gains.
However, there are minimum time limits for holding property to take advantage of the exclusions, and other details. Consult IRS Publication 523. And some higher-income earners could get hit with an additional tax if the gain exceeds the exclusion.
If you're eligible to itemize, the MID loan limit is $750,000. For loans taken out before Dec. 16, 2017, the limit was $1 million. Make sure your loan is grandfathered before claiming the old limit.
Interest paid on home equity loans and second mortgages is deductible, but only if the proceeds of such loans were used to buy, build, or substantially improve the home that secures the loan. You can’t deduct interest on home equity loans that were used for things like student loans or cars.
For all the interest to be deductible, the amount of all mortgage loans (first, second, home equity, and loans for a second home) can’t exceed the $750,000 or $1 million limits.
This article provides general information about tax laws and consequences, but shouldn't be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.
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