Tax Benefits Every Homeowner Should Know About
It’s tax season again, but being a homeowner might just make it rain at refund time. Check out the tax-deductible expenses, exemptions, and credits below. Whether you own a house, condo, or mobile home, they can save you big money when you file. Just be sure to compare your total itemized deductions against the standard deduction and see which is higher (you’ll have to choose between standard OR itemized on your return). It’s also good to know what you can’t deduct before you land in hot water with the IRS…
Mortgage Interest
A house payment is comprised of two parts: principal and interest. The principal goes toward reducing the amount you owe on your loan and is not deductible. However, the interest you pay is deductible as an itemized expense on your tax return. You can generally deduct interest on the first $750,000 of your mortgage (or $375,000 each if you’re married filing separately) if you purchased your home after December 15th 2017. Those who purchased earlier (10/14/1987 – 12/15/2017) can deduct interest paid on up to a $1m mortgage.
Property Taxes
You can deduct up to $10,000 of property taxes you paid (or $5,000 if you’re married filing separately). If you have a mortgage, the amount you paid in taxes will be included on the same annual lender statement that shows your loan interest information. If you paid the property taxes yourself but don’t have receipts, you should be able to locate the total tax amount on your county assessor’s website.
Home Improvements
Making improvements on a home can help you reduce your taxes in a few possible ways:
- If using a home equity loan or other loan secured by a home to finance home improvements, these loans will qualify for the same mortgage interest deductions as the main mortgage. Only the interest associated with the first $100,000 is deductible (and if you’ve already maxed out the interest deduction on your main mortgage, you won’t be eligible for any additional deduction for this loan).
- Tracking home improvements can help when the time comes to sell. If a home sells for more than it was purchased for, that extra money is considered taxable income. However, you are allowed to add capital improvements to the cost/tax basis of your home thereby reducing the amount of taxable income from the sale. Keep in mind that most taxpayers are exempted from paying taxes on the first $250,000 (for single filers) and $500,000 (for joint filers) of gains.
- Home improvements made to accommodate a person with a disability (yourself, your spouse, or your dependents who live with you) may be deductible as medical expenses. Examples include adding ramps, widening doorways/hallways, installing handrails or grab bars, lowering kitchen cabinets, or other modifications to provide wheelchair access.
- If you live in Washington State and apply with your county prior to construction, you may be able to get a 3-year property tax exemption for major home improvements (including an ADU or DADU) that add up to 30% of the original home’s value.
Home Office Deduction
If you run a business out of your home, you can take a deduction for the room or space used exclusively for work as your principal place of business. This includes working from a garage, as well as a typical office space. Unlike most of the other deductible expenses, you can deduct home office expenses even if you opt to take the standard deduction.
This deduction can include expenses like mortgage interest, insurance, utilities, and repairs, and is calculated based on “the percentage of your home devoted to business use,” according to the IRS.
Home Energy Tax Credits
For homeowners looking to make their primary home a little greener, either the Energy Efficient Home Improvement Credit or the Residential Energy Clean Property Credit can help offset the cost of energy efficiency improvements. Even better, these are credits, which means they directly lower your tax bill.
- Energy Efficient Home Improvement Credit: 30% of the cost for qualified high-efficiency doors, window, insulation, air conditioners, water heaters, furnaces, heat pumps, etc. Maximum credit of $1,200 (heat pumps, biomass stoves and boilers have separate max of $2,000).
- Residential Clean Energy Credit: 30% of the cost for adding qualified solar/wind/geothermal power generation, solar water heaters, fuel cells, and battery storage.
What You Can’t Deduct:
- Mortgage Insurance (this is a change as of 2022)
- Title Insurance
- Closing Costs
- Loan Origination Points
- Down Payment
- Lost Earnest Money
- Homeowner’s Dues*
- Homeowner’s/Fire Insurance*
- Utilities*
- Depreciation*
- Domestic staff or services*
*Unless it’s related to your home-office deduction—contact your tax pro to see if it’s a qualified deduction for you.
Do you have a low-income, disabled or senior homeowner in your life? Check out this article on King County property tax relief.
Psst…every homeowner’s financial situation is different, so please consult with a tax professional regarding your individual tax liability.
We earn the trust and loyalty of our brokers and clients by doing real estate exceptionally well. The leader in our market, we deliver client-focused service in an authentic, collaborative, and transparent manner and with the unmatched knowledge and expertise that comes from decades of experience.
© Copyright 2024, Windermere Real Estate/Mercer Island.
Adapted from an article that originally appeared on the Windermere Blog, written by: Chad Basinger.
Top 10 Predictions for 2024 Real Estate
Will 2024 be a good year for real estate? This question comes up a LOT, especially from those who are considering buying or selling a home in the near future. Housing economist Matthew Gardner weighed in with his top 10 predictions for what the real estate market will look like in the coming year. Here is what he had to say…
1. Still no housing bubble
This was number one on my list last year and, so far, my forecast was spot on. The reason why I’m calling it out again is because the market performed better in 2023 than I expected. Continued price growth, combined with significantly higher mortgage rates, might suggest to some that the market will implode in 2024, but I find this implausible.
2. Mortgage rates will drop, but not quickly
The U.S. economy has been remarkably resilient, which has led the Federal Reserve to indicate that they will keep mortgage rates higher for longer to tame inflation. But data shows inflation and the broader economy are starting to slow, which should allow mortgage rates to ease in 2024. That said, I think rates will only fall to around 6% by the end of the year.
3. Listing activity will rise modestly
Although I expect a modest increase in listing activity in 2024, many homeowners will be hesitant to sell and lose their current mortgage rate. The latest data shows 80% of mortgaged homeowners in the U.S. have rates at or below 5%. Although they may not be inclined to sell right now, when rates fall to within 1.5% of their current rate, some will be motivated to move.
4.Home prices will rise, but not much
While many forecasters said home prices would fall in 2023, that was not the case, as the lack of inventory propped up home values. Given that it’s unlikely that there will be a significant increase in the number of homes for sale, I don’t expect prices to drop in 2024. However, growth will be a very modest 1%, which is the lowest pace seen for many years, but growth all the same.
5. Home values in markets that crashed will recover
During the pandemic there were a number of more affordable markets across the country that experienced significant price increases, followed by price declines post-pandemic. I expected home prices in those areas to take longer to recover than the rest of the nation, but I’m surprised by how quickly they have started to grow, with most markets having either matched their historic highs or getting close to it – even in the face of very high borrowing costs. In 2024, I expect prices to match or exceed their 2022 highs in the vast majority of metro areas across the country.
6. New construction will gain market share
Although new construction remains tepid, builders are benefiting from the lack of supply in the resale market and are taking a greater share of listings. While this might sound like a positive for builders, it’s coming at a cost through lower list prices and increased incentives such as mortgage rate buy downs. Although material costs have softened, it will remain very hard for builders to deliver enough housing to meet the demand.
7. Housing affordability will get worse
With home prices continuing to rise and the pace of borrowing costs far exceeding income growth, affordability will likely erode further in 2024. For affordability to improve, it would require either a significant drop in home values, a significant drop in mortgage rates, a significant increase in household incomes, or some combination of the three. But I’m afraid this is very unlikely. First-time home buyers will be the hardest hit by this continued lack of affordable housing.
8. Government needs to continue taking housing seriously
The government has started to take housing and affordability more seriously, with several states already having adopted new land use policies aimed at releasing developable land. In 2024, I hope cities and counties will continue to ease their restrictive land use policies. I also hope they’ll continue to streamline the permitting process and reduce the fees that are charged to builders, as these costs are passed directly onto the home buyer, which further impacts affordability.
9. Foreclosure activity won’t impact the market
Many expected that the end of forbearance would bring a veritable tsunami of homes to market, but that didn’t happen. At its peak, almost 1-in-10 homes in America were in the program, but that has fallen to below 1%. That said, foreclosure starts have picked up, but still remain well below pre-pandemic levels. Look for delinquency levels to continue rising in 2024, but they will only be returning to the long-term average and are not a cause for concern.
10. Sales will rise but remain the lowest in 15 years
2023 will likely be remembered as the year when home sales were the lowest since the housing bubble burst in 2008. I expect the number of homes for sale to improve modestly in 2024 which, combined with mortgage rates trending lower, should result in about 4.4 million home sales. Ultimately though, demand exceeding supply will mean that sellers will still have the upper hand.
About Matthew Gardner
Matthew Gardner analyzes and interprets economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.
Matthew also sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.
Adapted from an article that originally appeared on the Windermere blog December 4th, 2023. Written by: Matthew Gardner.
We earn the trust and loyalty of our brokers and clients by doing real estate exceptionally well. The leader in our market, we deliver client-focused service in an authentic, collaborative, and transparent manner and with the unmatched knowledge and expertise that comes from decades of experience.
Planning ahead: how tax reform will impact your home deductions next year
While you may still be busy filing your 2017 taxes, it’s important to look ahead and be aware of how the new 2018 tax reform laws will affect next year’s return–especially if you’re a homeowner. Those who itemize will need to note some big changes in what they can and cannot deduct. Many will instead choose to use the new higher standard deduction ($12,000 for single individuals and $24,000 for joint returns) rather than itemizing their deductions.
What can you do now? Check in with your accountant for advice specific to your situation and filing status. Also, you’ll probably want to update your withholding amount to reflect the new deduction amounts. In the meantime, here is the skinny on 5 changes that may affect you if you own a home…
1. Mortgage Interest Deduction
The deduction that allows homeowners to reduce their taxable income by the amount of mortgage interest they pay has been scaled back.
- For loans taken out after 12/14/17, you can now only deduct mortgage interest paid on the first $750,000 of combined debt for primary and secondary residences (or $375,000 if married filing separately).
- Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap if they were taken out before 12/15/17 (or if you entered into your purchase contract prior to 12/15/17 and the sale closed by 1/1/18).
- You can continue to deduct the interest on grandfathered loans even if you refinance.
2. Home Equity Loan Deduction
Under the former tax law, you were able to deduct the interest on up to $100,000 of home equity debt even if the proceeds were used for something other than buying or improving the home (for example, an equity line of credit used to pay college tuition). This is now no longer the case.
- New 2018 law eliminates the deduction for interest on home equity debt unless it’s used to buy, build, or substantially improve the home that secures the loan.
- Loans to buy second homes do not qualify for the interest deduction if they’re taken out against the equity of your primary home.
3. Deduction for Property & Sales Taxes
Tax relief for homeowners who pay property taxes has also been limited.
- Itemized deductions for property taxes, sales taxes, state income taxes, and any other local taxes will now be limited to a combined total of $10,000.
- The combined limit drops to $5,000 if married filing separately.
4. Deduction for Moving Expenses
While you used to be able to deduct some moving expenses when you moved for a new job, this deduction has been repealed for everyone except active-duty members of the armed forces.
5. Deduction for Casualty Losses
Under former law, substantial losses to your home and personal property through things like fires and robberies could be deducted from your taxable income. Under the new law, this deduction is eliminated for everything except presidential-declared natural disasters.
Want to know more?
- New Tax Brackets and Standard Deductions
- How the Reform Might Affect Home Values
- Provisions Affecting Commercial Real Estate
The above article is presented for informational purposes only and is not intended to replace professional tax advice from your accountant.
Sources:
“The Tax Cuts and Jobs Act – What it Means for Homeowners and Real Estate Professionals,” by the National Association of Realtors
“5 Homeownership Changes Coming Under New Tax Law” by NerdWallet
“Tax Reform” by the Internal Revenue Service
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©2018, Windermere Real Estate/Mercer Island