What Homeownership Expenses Are Tax-Deductible?

Homeownership often comes with a myriad of benefits, but among them is a significant tax advantage. For most homeowners in the USA, you do not pay any income tax on profits made from selling your home. For instance, if you buy a home for $300,000 and sell it for $500,000, you're not required to pay taxes on the $200,000 profit. This, however, does not mean homeowners are completely off the hook for tax obligations. If you use any part of your home to operate a business, homeownership expenses can be a bit more tax-friendly. In this article, we'll explore which expenses you can and cannot write off as a homeowner.

General Tax Benefits for Homeownership

For most homeowners, the biggest tax benefit is that any capital gains from selling your home are exempt from income tax. However, there is one important caveat: you are not entitled to write off any profit from your home sale. This means if you make a profit, you won't owe taxes on it, but you can’t deduct it from your taxable income.

Deductible Homeownership Expenses

Even if you don't use your home for business purposes, you can still write off certain expenses as itemized deductions. These include:

Itemized Property Taxes: You can deduct the portion of your property taxes that you pay. This includes both local and state property taxes. Keep in mind, however, that the standard deduction for homeowners in 2023 is $13,850 for single filers and $27,700 for married couples filing jointly. Mortgage Interest and Mortgage Insurance: The interest on your home mortgage and mortgage insurance premiums can be deductible, but only if your total itemized deductions exceed your standard deduction. The standard deduction for 2023 is $13,850 for single filers and $27,700 for married couples filing jointly. There is also a limit on the amount of mortgage interest you can deduct if your loan balance exceeds $750,000.

It's important to note that if you decide to itemize your deductions, you must have enough itemized expenses to exceed the standard deduction in order to save taxes. For example, if your total itemized deductions are only $14,000, you won't derive any tax savings from itemizing your property taxes and mortgage interest, as the standard deduction is higher.

Home Office Expenses

If you use a portion of your home exclusively for a business, you can claim various expenses related to that area as business deductions. To qualify, the space must be used exclusively and regularly for business purposes. Here's how you can calculate your deductions:

square footage proration: Divide the square footage of the business area by the total square footage of your home to determine the prorated share of your home expenses. For example, if your home is 2,000 square feet and your business area is 200 square feet, the business area is 10% of your home. Therefore, you can claim 10% of your total home expenses as a business deduction. common area expenses: You can deduct the portion of home expenses that relate to the common space, such as homeowners insurance, utilities, cleaning, maintenance, and association dues (for condominiums). These expenses are prorated based on the space you use for your business. dedicated business expenses: Any expenses specific to the business area, such as repairs to that portion of the home, can be claimed in full. itemized portions: The portion of property taxes and mortgage interest that is not prorated to your 'home office' can be claimed as itemized deductions. However, if your total itemized deductions are less than your standard deduction, you will not save any taxes from these expenses.

For local property taxes and mortgage interest, some areas may have limits. For instance, money spent to try and change or create ordinances may be claimed, but political contributions to try and influence change are not deductible. Always check with your local tax authority for specific rules and regulations.

Other Homeownership Deductions

While basic living costs are generally not deductible for federal taxes, there are a few other expenses that can be claimed. For instance, money spent on veterinary care for pets can be claimed, as long as the pets are not considered livestock. Pets can be considered like any other family member, and if you have a pet that requires regular veterinary care, make sure to keep records of such expenses.

Remember, while writing off certain expenses can save you money, it's crucial that you keep accurate records of all your expenses and consult with a tax professional to ensure you’re complying with all tax laws and regulations. Proper record-keeping and understanding the nuances of tax deductions can make a significant difference in your tax situation.