More times than not, you are unable to deduct homeowners insurance itself from your taxes. However, there are cases in which things in your home may entitle you to a deduction.
Looking for more ways to lower costs on your homeowners insurance? Check here to find out how.
Mortgage Points Deduction
Mortgage points, also known as loan origination fees, maximum loan charges, and loan discounts, are equal to 1% of your loan amount. The mortgage industry uses two types of points: origination and discount points. Origination points are generally income for the loan originator while discount points are prepaid and oftentimes fully deductible.
In order to fully deduct mortgage points, you must have paid them fully and met the list of requirements:
- The mortgage must be used to buy/build your home.
- The points must be a percentage of your mortgage amount.
- The use of points must be a normal business practice in your area.
- The amount of points paid must not be excessive for your area.
- You must use cash accounting on your taxes.
- The points must not be used for items that are typically stand-alone fees, such as property taxes.
- You cannot have borrowed the funds to pay for the points from the mortgage lender or broker.
- The amount you pay must be clearly itemized as points on your statement.
If you are unable to deduct your points in the year you pay them, they are still eligible to be deducted over the lifetime of the loan.
Mortgage Interest Deduction
Mortgage interest deduction is a tax deduction for mortgage interest paid on the first one million of mortgage debt. This deduction allows you to reduce your taxable income by the amount of money you’ve paid in mortgage interest during the year.
Property Tax Deduction
Property Tax Deduction allows you to deduct the state and local taxes you’ve paid on your property from your federal income taxes. While this deduction is extremely beneficial, it’s important to keep in mind that taxes on things such as home renovations or local services, like trash collection, are not deductible. So what is tax deductible? Your primary home, vacation home, land, vehicles, and boats are all eligible to be deducted. However, you can only claim the property tax deduction if you choose to itemize your taxes. If you claim the standard deduction, you’re not eligible to also claim your property taxes. The Tax Cuts and Jobs Act cut the deduction for state and local taxes, including property taxes, at $10,000 ($5,000 if you’re married and filing separately). If the amount of taxes you’ve paid out over the course of the year exceeds those amounts, you’re not able to claim the full amount of your property taxes.
Many possible rental deductions are overlooked by landlords due to the fact rental properties offer much larger deductions. If you own a rental property, you may deduct expenses you pay for the upkeep and maintenance of the property, conserving and managing the property, and other expenses deemed necessary and associated with property rental. Landlords are eligible to deduct wages and salaries for employees, for example, residential managers or grounds workers. In addition to salaries, any expenses surrounding utilities, taxes, necessary and reasonable repairs to the property, and travel costs incurred while doing business.
Home Office Deductions
Those who are self-employed can deduct their home office expenses from their business income if their office qualifies. This includes people who work from home full-time, as well as people who have a freelance part-time job, and people who were self-employed for just a few months. To qualify for the home office deduction, you must use part of your home regularly and exclusively for business. Your office doesn’t need to be in a separate room, but it has to be in an area of your home where you don’t do anything else.
Learn more about homeowners insurance surrounding working from home here.
Home Improvement Deductions
Home improvements are any work done that adds to the value of your home, increases its livability, or adapts it to new uses. These include room additions, new bathrooms, decks, fencing, landscaping, wiring upgrades, walkways, driveway, kitchen upgrades, plumbing upgrades, and new roofs. However, if you are adding the improvements to your personal residence, you cannot deduct the cost of the improvements. This still has a tax benefit, though. Improvements can help reduce the amount of taxes you have to pay when you sell your home at a profit.
Those who upgrade their residences to utilize renewable energy may be eligible for a tax deduction to cut some of the costs. The equipment that qualifies for a deduction are as follows:
- Solar panels, electricity generated must be used in the home.
- Solar-powered water heaters, water heated by the system must be used inside the home, and at least half of the home’s water-heating capacity must be solar.
- Wind turbines that generate up to 100 kilowatts of electricity for residential use.
- Geothermal heat pumps that meet federal Energy Star guidelines.
- Fuel cells that rely on a renewable resource (usually hydrogen) to generate power for a home.
Medical Home Improvements Deductions
Home improvements can be deductible as a medical expense if their main purpose is medical care for you, your spouse, or your dependents. Examples of this are improvements to make your home wheelchair accessible or to make it easier for a disabled person to get around the home. These include:
- Constructing entrance or exit ramps for your home.
- Widening doorways at entrances or exits to your home.
- Widening or otherwise modifying hallways and interior doorways.
- Installing railings, support bars, or other modifications to bathrooms.
- Lowering or modifying kitchen cabinets and equipment.
- Moving or modifying electrical outlets and fixtures.
- Installing porch lifts and other forms of lifts.
- Modifying fire alarms, smoke detectors, and other warning systems.
- Modifying stairways.
- Adding handrails or grab bars anywhere (whether or not in bathrooms).
- Modifying hardware on doors.
- Modifying areas in front of entrance and exit doorways.
- Grading the ground to provide access to the residence.
Some improvements may not get a deduction, but increase tax value in the home, such as an elevator.
Capital Gains Tax Exclusion
Watching your home’s prices skyrocket is riveting, but it may be taxed. That’s because capital gains on real estate are taxable sometimes. The IRS can assess capital gains taxes on the difference between what you pay for an asset and what you sell it for. These gains can apply to investments, cars, boats, and real estate. $250,000 of capital gains is excluded on real estate if you’re single and $500,000 if you’re married and filing jointly. However, in order to qualify for this exclusion, you must meet a list of criteria:
- The house wasn’t your principal residence.
- You owned the property for less than two years in the five-year period before you sold it.
- You didn’t live in the house for at least two years.
- You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.
- You bought the house through a like-kind exchange in the past five years.
- You are subject to expatriate tax.