How to Do Your Taxes if You’re a Homeowner
Example: Let’s say your home sustained $20,000 in hurricane damage, but you were only reimbursed $10,000 by your insurance company. $20,000-$10,000 = $10,000 in unreimbursed damage. Your AGI is $70,000, so $70,000 x 10% = $7,000. $10,000 – $7,100 = $2,900 in deductible damage.
Special Note: Should You Take the Home Office Deduction?
Provided you are actually eligible for the home office deduction (learn more so you don’t get audited), deducting the expense could either be a smart decision or a poor one. That’s because once you claim that home office, it doesn’t count as part of your private residence anymore. When you sell your house sometime down the line, you’ll either make a profit or a loss. If you make a profit, the value of your home office will be taxed as a capital gain, at a maximum rate of 25%, costing you money. If you make a loss selling your home, you can deduct the value of the home office as a loss, making you money.
How the math works out for your depends on your situation, so it’s smart to talk to your tax preparer before you deduct your home office.
If You Took Out a Loan …
If You Paid Property Taxes … (Hint: You Probably Did)
Usually your property taxes are paid to your lender as part of your loan. But if you bought your house this year, you probably paid your fair share of the property taxes upfront. You can find out how much you paid on your settlement documents, and deduct it.
If You Paid Mortgage Discount Points …
When you pay a “point” toward your mortgage, that means you paid the equivalent of 1 percentage point of your loan upfront at closing in order to get a lower interest rate. This doesn’t go to pay off your loan, but it can save you money in the long run, which is why people do it. If you paid mortgage points, you can deduct them if:
- The loan is secured by your primary residence
- The loan was used to buy, improve or build the home
- Paying points is a common practice in the area of your new home and not more than normally charged
- The points are calculated as a percentage of the loan principal
- The points are clearly outlined on the buyer’s settlement statement, and
- The amount of cash you put into the purchase of your home (including down payment, closing costs, etc.) is at least equal to the amount you were charged for the points you paid on the loan
If you paid points to refinance your home instead of buying or improving your home, you deduct a portion of what you paid each year, spread out over the life of the loan. For example, if you paid 1,000 in points to refinance a 10-year loan, then you could deduct $100 each year.
If You Took Out a Personal Home Equity Loan …
What if you took out a home equity loan to pay for something other than your home, like tuition or home improvements? Well, it depends. Part or all of the interest you pay on that loan could be deductible for up to $100,000, or $50,000 if you are married filing separately. Here’s how the math works when it comes to tuition:
Let’s say your home is worth $200,000. You currently have a mortgage worth $150,000. So your home is worth $50,000 more than the mortgage. If you take out a home equity loan to pay for tuition, then you can only deduct the interest on $50,000 of that loan. That number would be the same whether you took a loan out for $60,000 or $200,000—you can only deduct interest on $50,000 of that loan.
If you find yourself getting hit with the alternative minimum tax (AMT), then you cannot deduct any portion of the interest on a home equity loan when calculating AMT.
However, if you used that $60,000 loan to build a shed and install a pool, you can deduct all of the interest whether or not you fall under the AMT. That’s because you used the loan to improve your property.
If You Sold a Home …
If You Made a Profit on Your Home …
If you sold your house for more than you paid, you technically made what is called a “capital gain.” Usually capital gains are taxed, but the gain you made on your home—up to $250,000 ($500,00 for married couples filing jointly)—is exempt from income taxes. You just need to have:
- Owned the property for two years, and
- Lived in it for two out of the last five years before you sold it
If you don’t meet these requirements, all is not lost. If you had to sell your home because of:
- Divorce or legal separation
- Job loss that qualifies for unemployment compensation
- Employment changes that made it difficult for you to meet mortgage and basic living expenses
- Multiple births from the same pregnancy
- Damage from a natural or man-made disaster
- “Involuntary conversion” by a local government under eminent domain law, for example …
Then the IRS will cut you some slack and only tax your gain partially. Learn more at the IRS website.
Also, if the gain you made is more than $250,000 (or $500,000 if you’re married filing jointly), dig around and see if you can find the receipts for any home improvements you made. That will establish the cost basis for the home as higher. For example, if you bought your home for $300,000 and made $50,000 in improvements, then sold it for $600,000, you can deduct that entire amount ($600,000-$350,000 = $250,000). If you hadn’t included those improvements, you would have been taxed on that extra $50,000 that exceeded the limit.