December 23rd, 2022 2:00 PM by Jackie A. Graves
Buying and selling a home can have a significant impact on your tax situation, including what and how much you can deduct on your income taxes.
Here’s a look at a few common expenses that the IRS allows you to deduct when you own your home.
One of the most common tax deductions for homeowners is the mortgage interest deduction. This allows homeowners to reduce their taxable income by up to $750,000* for the interest paid on their mortgage. This limit applies to single tax filers and couples who file jointly.
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If you paid more than $600 for mortgage interest in a year, you'll receive a Form 1068 Mortgage Interest Statement from your lender. These forms typically arrive in December in time for tax filing season.
Note: mortgage interest is an itemized deduction. In other words, you'll have to itemize on your taxes instead of taking the standard deduction.
*The $750,000 limit applies to mortgages taken out after December 15, 2017. The deduction is worth up to $1,000,000 for interest paid on mortgages taken out prior to December 15, 2017.
As a homeowner, you typically pay personal property taxes to your state, county and other local authorities throughout the year. When you file your federal income tax return, the IRS allows you to deduct these personal property taxes up to a certain limit.
Specifically, the tax law says that you can deduct up to $10,000 combined for all state and local taxes. So, if you also plan to deduct your state income or sales tax, these will also count toward that $10,000 limit.
Note: you can only deduct the property taxes actually paid during the year you're filing.
To deduct your property taxes, you'll need to itemize your taxes instead of taking the standard deduction. If your property taxes are paid out of escrow, you'll find the amount paid on Form 1098 Mortgage Interest Statement. Otherwise, your local tax authority may also provide a copy of the property tax bill for you to use for your tax records.
If you bought or sold your home partway through the year, you can usually deduct any property taxes paid during the tax year—prior to the purchase or sale.
Some homeowners choose to buy discount points from their lender to lower their mortgage interest rate. The IRS will let you fully deduct those points the year you paid them if you meet the following requirements:
You can also deduct points paid on a loan used to improve your main home. The requirements listed above still apply.
If you are self-employed and have a space in your home entirely dedicated to your business or work, the IRS may allow you to deduct home office expenses. The amount you're allowed to deduct depends on how big your space is and what method you use for calculating the deduction.
For instance, using the simplified method, you'll measure the square footage in your home office and multiply by the current flat rate (In 2022, you could deduct $5 per square foot of home office space, up to 300 square feet). Using the regular method, you'll calculate the space as a percentage of total square footage in your home and deduct a percentage of related expenses.
Read the full set of rules to deduct expenses for business use of the home.
For a complete list of filing requirements, limits and special cases for each of these deductions, visit the IRS website at www.irs.gov.
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