If you own a house, You are eligible for several special tax breaks. But many of these rules changed over the years, especially after the Tax Cuts and Jobs Act was signed in December 2017. There are some major tax benefits of owning a home, and how homeowners can make new rules.
- New rules for mortgage interest reductions.
- Limited deduction for home-equity loans.
- Deduction cap for property tax.
- Home-office deduction for self-employment only.
- Tax exclusion for home-sale profits.
New rules to cut mortgage interest
The tax deduction for mortgage interest is one of the most valuable tax breaks for homeowners. But the Tax Cuts and Jobs Act reduced the amount you can deduct. If you purchased your home before December 16, 2017, you can deduct the interest paid on the $ 1 million in mortgage loans (or up to $ 500,000 if you are filing separately). But if you purchased your home after that date, you can only deduct the interest paid up to $ 750,000 in mortgage loans (or up to $ 375,000 if you are married separately).
if you Refinance your mortgage, Your cut-off is based on the date you originally purchased the home. Barbara Weltman states, “If you are only refinancing an outstanding home acquisition loan you received before December 16, 2017, the new mortgage is essentially considered old. In other words, you can use the old $ 1 million limit Can. ” Author of “JK Lasser’s 1001 Deductions and Tax Breaks 2021.”
You may be able to reduce the mortgage interest paid on the second home, to the extent of $ 750,000 or $ 1 million for both joint loans. “If you have a second home, you have to tie the two mortgages together, and that’s a combined total,” says Carrie Weston, director of tax practice and ethics for the American Institute of CPAS.
You will receive Form 1098 reporting the mortgage interest paid during the year. For more information about the calculation, see IRS Publication 936, Home mortgage interest deduction
Another hurdle to overcome: if you can only deduct mortgage interest Your cut item, And fewer people now say that the equal tax law doubled the standard deduction. If all of your itemized deductions for 2020 are less than $ 12,400 if you are single, $ 18,650 for the head of household or $ 24,800 for married couples filing jointly, then you will take the standard deduction instead of the item. (Standard deduction is higher for age 65 and above for taxpayers)
Limited deduction for home equity loan
Formerly, you could have deducted interest paid for up to $ 100,000 in a home equity loan, regardless of how the money was used – whether you used the loan to pay for college, or high- To pay or renew an interest credit card. Your home But now you can only deduct interest on a home equity loan if you use the money to buy, build or significantly improve the home. Interest can be deducted on eligible home loans up to $ 750,000, including both your mortgage and the home equity loan used to improve the home.
For example, interest can be tax-deductible if you use the money for major home improvements, such as adding a deck or renovating your kitchen. “You want to get an appraisal before you start and after you’ve done it, so there’s no question that it will increase the value of your home,” says Weston. Maintenance, such as painting a room, does not count. “If you add a new roof, a deck is added or if you’ve knocked down a wall and expanded your kitchen, things that change the structural value of your home improve,” she says .
you can still Take out a home equity loan For other reasons, such as paying credit card bills or college tuition, but interest will not be tax-deductible.
Deduction cap for property tax
Another major change from the Tax Cuts and Jobs Act was the reduction in property tax. In the past, your property taxes were deductible if you itemized. Starting in 2018, you can only deduct up to $ 10,000 in all your state and local taxes. This limit includes property taxes, as well as state and local income taxes that were withheld from your paycheck or projected payments, or made through state and local sales taxes.
“If you’re in a state with high property taxes or income taxes such as Illinois, New York or California, you may be able to deduct a lot more in the past, but now you’re limited to $ 10,000,” says Michael Landsberg. , A CPA financial planner in Atlanta and a member of the American Institute of CPA’s Financial Literacy Commission. In addition, you can only take this deduction if you itemize instead of taking the standard deduction.
Like many provisions of the Tax Cuts and Jobs Act, the limit is set to expire after 2025, but Weston says it is one of those provisions that could have been changed before then. “I wouldn’t be surprised if it came back or grew,” she says.
Home-office deduction for self-employment
In the last one year many people have been working remotely and setting up home offices. These expenses may be tax-taxable if you are self-employed, but if you are not an employee – the Tax Deductions and Jobs Act eliminated the deduction for untrained employee occupational expenses, including those for employees working from home Includes home-office expenses for an employer.
But people who are self-employed or have someone Independent income Home-offices can still qualify for the deduction if they use the “regular and exclusive” portion of their home for business. Your home office does not need to be in a separate room, but it should be in an area of your home where you do nothing else. If you just do some freelance work on the side, you may still be eligible for a break, or if you were self-employed for some time of the year looking for full time, you might be able to make the cut for a few months. Can be enabled. work. “You don’t need to be self-employed full-time as long as you’re really using that space regularly and specifically for business,” says Weston.
You can either deduct based on your actual expenses, or you can make a simplified deduction.
If you deduct based on your actual expenses, you may pay your rent or mortgage interest, homeowners ‘or renters’ insurance, and a portion of utilities (such as electricity, gas, and water) based on a percentage of the total area of your home. Can be cut. Used for your home office. For example, if your home office is 1/10Th In total square footage of your home, you can deduct 10% of those expenses. Don’t forget to include other expenses for your home, such as a pest control service or homeowners’ dues, says Weston. You can also deduct the entire cost of maintenance and repair in your home office, such as the cost of painting that room.
Another option is to take a simplified version of the home office deduction, which is very easy, but may result in a minor deduction. Instead of using your actual expenses, you can deduct up to $ 5 per square foot of your home office, up to 300 square feet, a maximum deduction of up to $ 1,500. For more information about home office deductions, see IRS Publication 587, Commercial Use of Your Home.
Tax exclusion for home-sale profits
Many people can exclude themselves Home sale benefits from taxes – And they don’t realize that they are eligible for this tax break. If you live in your home at least twice out of the five years prior to the sale, you can invest up to $ 250,000 in home-sale profits if you are married jointly. This is a benefit, not just the selling price – so a married couple who buys a house for $ 200,000 and lives there for at least two years will not have to pay taxes on their gains until they can afford the house for $ Examples do not sell for more than 700,000.
If you have not lived in the home for two years, you may be eligible for partial exclusion if you have moved because of some life-changing events, such as eligible employment changes or health changes, Lived in the house based on the number of months. For example, if you are married and have moved away after a year because you started a new job that was more than 50 miles away, you could make $ 250,000 (half of the $ 500 of sales) from taxes in home-sales profits. I could have removed.
If your home-sale benefit is greater than the exclusion or if you do not meet the two-year requirement, you may be able to Reduce tax bill By adding some expenses on a cost basis. Aadhaar is usually the amount paid for the house, but you can also add some other expenses that can help reduce your taxable profit. Landsberg says, for example, that you can add the cost of a home improvement that greatly increases the value of the home. “People need to be very cautious and keep careful receipts,” he says. If you add a deck or remodel your kitchen, for example, even if you don’t plan to sell the house for a long time, keep the receipts in your tax files – so you’ll have records and you’ll be able to Costs can add basis if you end up with a taxable profit. Landsberg says, “You always want to make sure everything is entered. It’s easy to just scan in receipts and put them in PDF form.”
Some closing costs and other expenses can also be linked to Aadhaar, including recording fees, owner’s title insurance, legal fees, surveys, payment of taxes and sales commissions, he says.
The $ 250,000 / $ 500,000 exclusion applies only to your primary residence, but some people move in second home Weston says they can qualify for a boycott for two years before selling. “There is no exclusion for the second house, but what you often see is that if someone is using the other house as a rental, if they know they want to sell it in advance, they give two Move to another house for years and then they can make it out after two years, ”she says.
Also, since you must have lived in the house for two out of the last five years, if you lived in the house a few years ago, start renting it, keep an eye on the calendar and consider selling the house before five. – The period of the year has been completed, so you may qualify for exclusion.