If there’s one advantage of paying a mortgage rather than renting, it’s the deductible expenses you can write off. While they might not eliminate the taxes you owe, they can definitely reduce what you owe.
Keep reading to learn which expenses you can write off and which are ineligible for write-offs.
Expenses You Can Write Off
The most common expenses you can write off are mortgage interest, real estate taxes, and mortgage points.
The interest you pay on your mortgage is likely the largest deduction you’ll receive. This is good news since the first few years of payments are mostly interest! As long as your mortgage is less than $1 million, you can write off the interest.
The interest you can deduct pertains to your primary residence, second home, or investment home. You can also deduct interest from a refinance, home equity loan, or HELOC. However, you may be limited to writing off interest on the first $100,000 of a home equity loan or HELOC. If you have a vacation home, make sure you spend at least 14 days out of the year there. If you rent it out, you must stay there at least 10% of the number of days you rent it in order to get the deduction.
Real Estate Taxes
If you look at your monthly payment breakdown, next to mortgage interest, you likely pay quite a bit for real estate taxes. Even if you don’t escrow your taxes, you still pay them each year. Total up that amount and deduct them on your taxes. This deduction pertains to your primary residence only. You must prove that you paid the taxes in that tax year in order to take the deduction.
Note – if you bought your house this year, you and the seller likely split the tax bill. You can only deduct the portion of the taxes you paid. You can find this amount on your settlement statement from the closing.
If you purchased or refinanced your loan this year, check to see if you paid points. You can only deduct the points during the year that you paid them for a purchase. It also needs to be normal business practice for your area, and within a range that is common for the area. In other words, if you paid excessive points (which the Qualified Mortgage rules don’t allow) you could only deduct some of them. Chances are, though, you’ll be able to deduct all points paid.
If you refinanced, you’ll deduct a prorated amount of the points you paid. The IRS requires you to divide the points up over the life of the loan. If you paid $3,000 on a 30-year loan, you’d deduct $8.33 per month or $100 per year.
The above expenses are the most common deductions. There are, however, a few other items you can write off.
- Accidental loss – Losses you experience pertaining to your home that were accidental may qualify. They must be accidental, meaning due to the weather, theft, or fire. The damages must exceed 10% of your adjusted gross income before they become a deduction.
- Home office – If you work from home and use a specific area of your home just for work, you may be able to deduct the expenses of having the home. This includes writing off the utility bills, repairs, and business expenses pertaining to the office.
- Moving deductions – If you move because you have a new job located at least 50 miles away from your current home, you may write off the moving expenses.
Expenses You Cannot Deduct
Unfortunately, not all expenses pertaining to your home qualify you for a deduction. Certain expenses are just a part of being a homeowner. They include:
- Insurance premiums on any type of insurance, including homeowner’s insurance
- Extra payments made to your mortgage to lower the principal balance
- The cost of maintaining and repairing your home
- Mortgage insurance
Before you file your taxes, make sure you talk to your tax advisor about your home. As you can see, there are many advantages of being a homeowner. While you only receive a percentage of the amount you paid back in taxes, every dollar helps. It can help lower your tax liability. Just remember, it’s not a credit – meaning you don’t get a dollar for dollar return on your investment. However, mortgage interest all on its own can significantly decrease your tax liability.