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  • Homeownership Tax Tips

    If you own a home or are planning to buy one, there are a few things you need to know from the tax standpoint that could save you money:

    1. Mortgage Interest

    If you have a mortgage, you can typically deduct the interest you pay on the loan up to $750,000 ($1,000,000 if taken before December 16, 2017) but only if you itemize your deductions (schedule A)

    You can also deduct points you paid if you meet a certain criteria (relates to a principal residence, secured by a mortgage, etc) if you itemize. By the way, many people miss deducting points on their tax returns when they purchase a house.

    1. Property taxes

    Property taxes can be deducted on your tax return if you itemize deductions. The total amount of taxes (including state and local income taxes) is capped at $10,000.

    By the way, there is a discussion in 2025 about potentially removing the cap or increasing it to $20,000 for married individuals as part of the new tax law. I will keep you posted on any changes.

    Currently, about 90% of people claim the standard deduction, so only a small percentage are itemizing.

    1. Improvements

    Improvements are significant enhancements made to your home that increase its value.

    Many people overpay on taxes when they ultimately sell their house because they don’t keep track of these improvements.

    Here are some examples provided by the IRS:

    • Putting an addition on your home
    • Replacing an entire roof
    • Paving your driveway
    • Installing central air conditioning
    • Rewiring your home
    • Building a new deck
    • Kitchen upgrades
    • Lawn sprinkler system
    • New siding
    • Built in appliances
    • Fireplace

    Now, these costs aren’t deducted, but they are added to your home’s cost basis. This could lead to lower capital gains taxes when you sell your property (more on this later).

    Repairs, on the other hand, don’t impact your basis and don’t affect your taxes (e.g. repairing a broken fixture, patching cracks, etc)

    You will need to document every improvement, as this can help you save money on taxes.

    Keep your receipts and invoices (upload them to Google Drive) and record the dates and descriptions of the work done.

    Taxes when selling your house

    When you sell your house, here’s the formula:

    Selling price 

    – Selling expenses (like realtor fees)

    – Adjusted cost basis (how much you purchased it for, + all these capital improvements I talked about above + any closing costs you paid when you acquired the home (legal fees, recording, survey, stamp taxed, title insurance)

    = Gain/Loss

    You will need to pay capital gains tax if there is a gain, but, luckily there is a gain exclusion (Section 121 exclusion) that can also help you save on taxes.

    Gain exclusion

    If you sell your primary residence, you may be able to exclude up to $250,000 ($500,000 for married) of the gain from taxes if you meet some conditions.

    • Ownership (must have owned the home for at least 24 months within the 5 years prior to sale. For married couples only one spouse needs to meet this requirement)
    • Residence (you must have used the home as your main residence for at least 24 non-consecutive months during the 5 years before the sale. For married couples both spouses must meet requirements.
    • Look-back (you must not have claimed the exclusion on another home within the 2 years before this sale).

    Now, many people don’t know this but there is actually a partial exemption. 

    1. Work related move (i.e. you started a new job at least 50 miles farther from home)
    2. Health related move (you moved to obtain, provide, or facilitate care for yourself or a family member)
    3. Unforeseeable events (casualty, divorce, death, financial difficulty)
    4. Special circumstances

    So, instead of claiming the full exclusion, you can exclude a prorated portion of the $250,000/$500,000 limit based on how long you owned and lived in the home.

    By the way, you can rent out a home for 2 years and still qualify for the exemption, as long as you lived there for the required period before selling (many people do this).

    Tax example selling a home

    You bought a home for $200,000 (including all other costs) in 2018. You built a new deck, new roof and siding totalling $50,000. You now sold your home for $500,000. You are single. Selling costs are $20,000 (agent fees, etc)

    Sale price: $500,000

    -$20,000 of selling costs

    -(200,000 + 50,000) = $250,000 (adjusted basis)

    Total Gain = 230,000

    Exclusion = $250,000.

    Total taxes paid = $0.

    But what if you didn’t keep track of all your renovation costs like new siding or a deck? You would’ve had to pay taxes on $20,000 of capital gains! 

    Overall, knowing how these things work can literally save you thousands in taxes. I hope you enjoyed this one. If you have any suggestions on the topics, feel free to reach out. I read all the emails.

    See you next Saturday.

    MC, CPA

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