Are you claiming all the tax breaks you’re allowed as a homeowner? If not, you could be leaving hundreds or even thousands of dollars on the table each year. Read on to learn about the money-saving opportunities the tax code provides to people who own their primary residence.
What’s New in Homeowner Tax Breaks?
The Tax Cuts and Jobs Act that went into effect last year changed some long standing homeowner tax breaks. The combined mortgage interest and property tax deduction got capped at $10,000, while the standard deduction doubled from $6,000 to $12,000 for single taxpayers and from $12,000 to $24,000 for married taxpayers.
What does this change mean for you? If you used to itemize your deductions so that your mortgage interest and property taxes would lower your tax bill, it may no longer make sense to do so. Many taxpayers will end up with the same or greater tax savings thanks to the doubling of the standard deduction, but it can be frustrating to no longer see any tax benefit from paying mortgage interest or property taxes.
Single taxpayers will have an easier time than married taxpayers when it comes to exceeding the standard deduction and continuing to be able to deduct their mortgage interest and property taxes (up to $10,000), along with charitable donations and other Schedule A deductions.
Property Tax Assessments: Is Yours Accurate?
A significant homeowner tax tip is to make sure you aren’t paying any more property tax than you have to. Your tax bill is based in part on your property’s assessed value, and if you have substantive reasons to believe the assessed value is too high, you may wish to appeal it.
Examine the assessed values of homes similar to yours to see if it could be worth filing an appeal. On the assessor’s website, you can look up the assessed value of any property, such as homes in your neighborhood with similar square footage, lot size, and upgrades as yours.
A 2017 report by Denver’s ABC Channel 7 says that about half of all property tax appeals are granted. Colorado homes are reappraised every odd-numbered year, which means 2019 is a year to potentially challenge your home’s assessed value. (Learn more in Property Taxes: Understanding Your Colorado Tax Bill).
Tax Exemptions When Selling Your Home
If you sell your home and you’ve occupied it as your primary residence for at least two of the last five years that you’ve owned it, you don’t have to pay tax on up to $250,000 in gains from the sale if you’re single or $500,000 if you’re married and file jointly. You may be able to avoid taxes on profits after a shorter ownership and occupancy period if unforeseen circumstances such as death, divorce, or job loss cause you to sell.
Here’s an example of how the tax savings work. If you’re single and you sell the home you bought for $100,000 for $400,000, you have a gain of $300,000. The first $250,000 of that is not taxable, and the remaining $50,000 is.
Keep your receipts for any home improvements you make. You can use these to increase the cost basis of your home when you sell, which may allow you to avoid more taxes. In the example above, a $50,000 home addition would increase the home’s basis to $150,000, making the gains from sale $250,000 rather than $300,000 and saving the taxes that would have been due on the $50,000 gain.
First-Time Home Buyer Savings Account Deduction
Colorado residents buying their first homecan deduct the amount of taxable interest and/or earnings on a qualified First-Time Home Buyer Savings Account. Claiming this deduction requires you to submit an extra tax form, DR 0350, with your state return each year. When you withdraw money from the account for eligible home buying expenses, such as a down payment or closing costs, you must submit your mortgage settlement statement along with your tax return to prove that you’ve used your account as intended.
Home Office Deduction
If you earn income from self-employment or freelancing and you can set aside a portion of your home to use regularly and exclusively for business purposes, you may qualify to claim the home office deduction. Your home office needs to be your principal place of business.
This deduction can open up a world of tax savings. Let’s say you have a spare bedroom that you devote 100 percent to your business, and it occupies 10 percent of your home’s total square footage. You may be able to deduct 10 percent of many common home ownership expenses on your tax return, including these:
Homeowners association fees
Property taxes and mortgage interest not itemized on Schedule A
You may also be able to deduct 100 percent of improvements to your home office. To benefit from any of these deductions, you will have to earn a meaningful profit from your business. If you have a $100 profit, you can’t deduct $1,000 in home office expenses. If you have a $5,000 profit, you can.
Because of changes implemented through the 2017 Tax Cuts and Jobs Act, it won’t be as easy in tax years 2018 through 2025 for homeowners to qualify for certain tax deductions. Many opportunities to lower your tax bill are still available, however. To make sure you get all the homeowner tax savings you qualify for, talk to a professional tax expert about the details of your situation.