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Tax Breaks for Homeowners: What is Deductible, and What’s Not?

It is not an uncommon question to be asked what someone can deduct with their home. With the new tax laws, many answers are still quite similar, while the benefits may change for others.

First the easy question, can I still deduct my home on my tax return. The answer is yes. You can continue to include your mortgage interest paid and property taxes paid as part of your itemized deductions. There were some limits introduced and or modified that will reduce the amount high value homes are allowed to deduct (your home mortgage exceeds $750,000.00 or property taxes are close to $10,000.00 a year), but that does not change the fact that the deduction still exists.

Using the Standard Deduction

The part that people will challenge, in my opinion is a matter of perspective – has to do with the new standard deduction. Your total itemized deductions, including your home, charitable giving, etc is all totaled as a big number, and you are allowed to use that number to reduce your income for tax purposes, OR you can use the number of the standard deduction. You want to and are entitled to use the larger of the two numbers.

In 2017 the standard deduction amount for a married couple was $12,700 (half of that for single filers). So if your total itemized deductions were $18,500.00 – you would have included your itemized deductions (like your home). In 2018 the standard deduction for a married couple is $24,000.00 (again half for single filers). Now you have a different choice in 2018, do you reduce your taxable income by the $18,500.00 or the $24,000.00? Of course you would pick the $24,000.00 as it saves you more tax dollars. In that event though, you chose a deduction that was different that your deductions with your home. From one perspective, one could easily say that because you will choose the standard deduction – that you can no longer deduct your home. My perspective is different, it is more that you made the choice not to because you had a better option but could pick between the two. Of course, if your total itemized deductions are $27,550.00, you would then choose the itemized deductions either way.

What else can I deduct from my home?

If you would consider that your itemized deductions are like your allowed ‘personal’ deductions it makes a tiny bit more sense when the answer is simple – mortgage interest and property taxes. No utilities, no HOA, nothing else. If there is a portion of your home that is business use (not work, actual business, like you own a business or are an independent contractor), then things like utilities and HOA are partially included as a business deduction (not the whole amount, an amount consistent with the ratio of office space to total space, commonly 5-10%). Rental home(s) have no change to their treatment in the past for deductions.

Those, whom the universe loves because they choose to live in the great state of Texas where Molen & Associates is located, can also include the sales tax paid on major improvements to their home. It is often difficult to get a contractor to separate material costs and labor costs, but if it can be obtained, then generally the sales tax can be included. It is not the entire improvement, that is instead added to your basis (or purchase price) of the home for future calculations. If you purchased a home for $100,000.00 and put $20,000.00 of improvements into the home (tile, kitchen redo, master bath redo, BBQ patio, etc) then for tax purposes your purchase price of the home is now $120,000.00. The sales tax on improvements is part of the $10,000.00 limit with your property taxes and other state or sales tax.

Please continue to bring your mortgage interest tax form(s) [1098-MORT] to your tax professional, and your property taxes paid in the calendar year if you do not have them escrowed as part of your note. If you believe your facts are circumstances are different, such as owning a high value home, or paying lots of property taxes in one year – please consult with your tax professional for answers tailored specifically for your particular tax return. It may well be different for you than your neighbor or family member!

Charles Steinmetz
Senior Tax Professional

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