There are many tax benefits for homeowners who identify and save the necessary documentation. While you may focus on getting your down payment together to get through the closing, your tax benefits start at the closing and continue until you sell your home.
In this article, we'll provide an overview of the many ways homeowners gain tax benefits. One of the key qualifiers is whether your home is just a personal residence or you're conducting tax qualifying activities in your home. If you're using a portion of your home for a business or you rent out part of your home, you'll be able to deduct a portion of your home improvement expenses.
Tax Benefits When You Buy (and Sell) a House
- When buying a home, you can deduct daily interest from the day of the closing, to the end of the month. Any loan discount points or origination fees are tax deductible to the buyer, regardless of who pays them.
- When selling your home (must have been your primary residence for at least 2 of the last 5 years), you won't have to pay federal taxes on up $500,000 ($250,000 for singles) in profit on the sale of the house.
- If you refinance your home, you can deduct loan discount points but not until you sell the house.
Homeowner Tax Deductions and Tax Credits
Most homeowners are familiar with the tax benefits of owning a home versus renting, and your ability to deduct mortgage interest. To clarify:
- Home mortgage interest charged on a loan used to buy or improve your principal residence, can be deducted in the year paid. This should result in lower income taxes.
- Interest paid on an additional $100,000 of mortgage debt, like a home equity loan, can be deducted. What's different is this loan can be used for any purpose, e.g. you could use the money to pay off credit cards.
- Property taxes can also be deducted in the year paid, just like mortgage interest.
- Federal and state tax credits are used to motivate homeowners to make certain improvements to their home. Examples are home improvements to save energy like energy efficient appliances or solar panels.
Tax Benefits for Income Producing Activities at Home
To qualify for a home office deduction you need a legitimate business, and have to use part of your home regularly and exclusively for business (visit the IRS website to make sure your home office qualifies for tax benefits). If you rent part of your home, you can deduct a portion of your home improvement expenses from your rental income.
- Direct expenses can be deducted in full when they ONLY affect the business part of your home, like painting your home office or repairing a leak in a rental apartment.
- Indirect expenses can be pro-rated, based on the percentage of your home's living space allocated to income producing activities. These expenses may include home repairs, utilities and insurance.
- Unrelated home maintenance expenses unrelated to business use, e.g. lawn care, cannot be deducted.
- Depreciation on home improvements which significantly increase the value of your home, can be deducted based on the percentage of income producing space, like a home office or rental living space.