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10 Tax Tips for Homeowners - Money Saving Answers

10 Tax Tips for Homeowners

The benefits of owning a home are abundant. You have the freedom to decorate as you please, whether it’s hanging up artwork or painting a room a vibrant color. However, along with the joys come responsibilities, such as managing a mortgage, addressing property liabilities, and handling seasonal maintenance tasks.

While some aspects of homeownership may seem daunting, navigating the tax implications doesn’t have to be overwhelming. In fact, there are numerous tax advantages available to homeowners. Whether it’s understanding deductions related to your mortgage or maximizing benefits from your home insurance, we’re here to simplify the process. Let’s explore some straightforward tips that can shed light on various tax-related matters concerning homeownership.

While this tip may not be the most practical, it’s undeniably fascinating. As we’ve highlighted earlier, deducting mortgage interest can be a significant way to maximize itemized deductions. For many, this translates to leveraging a mortgage loan to optimize tax benefits.

But here’s where it gets interesting: If you’ve acquired a loan for a recreational vehicle or boat equipped with sanitation, cooking, and sleeping facilities, you can also deduct the mortgage interest on that loan. Essentially, if your RV or boat is livable, you can classify it as a second home and claim the deduction accordingly.

However, here’s the downside for affluent individuals with multiple properties, boats, and RVs: You can’t claim these deductions if you’re subject to the alternative minimum tax, designed for those with higher incomes.

The allure of the home office deduction entices many homeowners during tax season. At first glance, it seems straightforward: designate a room as your home office, deduct Internet bills, office furniture costs, and enjoy the feeling of your home working for you. However, most people shy away from claiming this deduction due to fears of triggering an audit and the perceived complexity of the process.

But hold on a moment. Claiming a home office deduction has become much simpler, and there’s no evidence to suggest that it increases audit risk. You do need to ensure you meet specific criteria, but homeowners who operate a small business or have a dedicated office space should consider taking advantage of this deduction. The key requirement is using the home office space exclusively and regularly for business purposes. This means you can’t claim shared spaces like the family room or an empty room where you occasionally take business calls.

If you meet the criteria for exclusive and regular use, the IRS offers a simplified method of deduction. Instead of calculating the percentage of utilities and other expenses used for business, you can multiply the square footage of your business space (up to 300 square feet or 91 meters) by $5 to determine your deduction amount.

While it might initially sound unusual to consider purchasing another home for tax savings, for most individuals, it’s not a practical strategy for financial gain. However, there’s a notable aspect to consider: all the tax benefits applicable to your primary residence extend to a second home as well. This includes deductions for mortgage interest (up to $1.1 million), property taxes, and more.

The caveat is that these deductions are only applicable if you’re not renting out the second home. If you’re renting it out for less than 14 days annually, you’re in luck – any rental income earned during this period is tax-free, alongside other deductions. However, if you rent it out for more than 14 days, you’ll need to report all rental income. Yet, if you still use the property personally, you can utilize deductions based on the percentage of personal use. For example, if you rent out the house for a few months, use it for a month, and keep it empty for the rest of the time, you can’t deduct the cost of the rental period. However, all other expenses remain eligible for deduction.

For many homeowners, the journey includes periods of both selling and buying homes. While we’ve covered some beneficial tax deductions for selling your home, it’s essential not to overlook the expenses associated with relocating to a new house. If your move is prompted by a new job, there’s potential to deduct a significant portion of your travel costs.

However, it’s crucial to clarify: Moving expenses are deductible solely for new job-related relocations, subject to specific criteria. In essence, your new job must be a certain distance away from both your old and new residences, and you must work full-time for at least 39 weeks in the year following your move. If these requirements are met, you can claim various deductions, including travel expenses to the new location, costs of a storage unit (for up to 30 days), and even lodging expenses along the way. Furthermore, this deduction isn’t limited to just the new employee; it extends to all household members. Additionally, you can even deduct the expenses associated with relocating family pets, making Rover’s presence beneficial in more ways than one.

If you’re planning to itemize your deductions to maximize benefits like mortgage interest, relying solely on memory won’t suffice. Keeping track of actual expenses is crucial, which entails maintaining receipts, bills, and any necessary paperwork for potential IRS scrutiny during an audit.

To streamline the process, it’s essential to establish an organized system for tracking finances if you’re itemizing. Consider investing in a scanner to create digital backups alongside hard copies of receipts. Moreover, employing a software system or digital filing system tailored to your needs can efficiently track and store deductions, saving time come tax season.

Owning a home isn’t the only opportunity for tax benefits; selling your house can also offer advantages. While selling solely for tax savings isn’t advisable, it’s wise to leverage potential benefits where possible.

Did you promote your home sale in any capacity? You can deduct these advertising costs. Similarly, expenses like title insurance and certain repairs made around the sale time can also be written off. What’s more, if your profit from the sale falls under $250,000 (or $500,000 for married couples), it isn’t taxable, provided you’ve lived in the house for at least two out of the five years of ownership.

For homeowners facing financial hardships, debt cancellation can present unexpected tax consequences. In situations like short sales or foreclosures, cancelled debt is considered taxable income. This means that any forgiven debt by a lender must be reported as income, potentially resulting in significant tax liabilities. It’s crucial to understand the tax implications of debt cancellation and seek professional guidance to navigate these complex scenarios.

If your home or property sustains significant damage due to unforeseen events, you may be eligible for a casualty loss deduction. However, this deduction is only applicable to those who itemize their taxes. Casualty losses encompass a broad range of events, from natural disasters to vandalism. It’s essential to calculate the fair market value of the property and deduct any insurance reimbursements or lawsuit settlements received. Additionally, certain deductions may apply, such as subtracting $100 per event and 10 percent of your AGI.

Surprisingly, the IRS allows you to deduct your property taxes on your federal tax return. Even though property taxes are often paid through your mortgage lender’s escrow account, you can claim them as deductions. Your yearly summary should detail the property taxes paid for your property. However, ensure you only deduct your portion. It’s crucial to remember that this deduction is only available to those who itemize their deductions, not those who opt for the standard deduction.

Deciding whether to itemize your deductions can be a taxing decision. While taking the standard deduction offers simplicity, homeowners may find greater benefits by itemizing. Mortgage interest payments are fully deductible and could potentially yield a larger tax break compared to the standard deduction. Given that a significant portion of monthly mortgage payments typically goes toward interest, this deduction can lead to substantial savings. However, it’s essential to note that itemized deductions only become effective after surpassing two percent of your adjusted gross income (AGI). For instance, if your AGI is $60,000, the initial $1,200 of itemized expenses won’t count.