Tax Strategies for Homeowners

Tax Strategies for Homeowners

Being a homeowner comes with a lot of responsibilities and rewards — and a lot of costs. In fact, many people will suggest that you set aside 1% of the purchase price of your home for annual maintenance alone. That means if your home is valued at $250,000, you should plan to spend about $2,500 each year on maintenance.

With so many costs involved in owning a home, it’s a good thing that there are ways you can get tax breaks to recoup some of that money. There are many different tax write-offs homeowners can realize and tax strategies they can take to reduce their overall cash outlay.

Below are some of the tax strategies homeowners can take.

Write Off Interest and Property Taxes

One of the most common tax deductions homeowners can take is writing off the interest they pay on their mortgage as well as the local and state property taxes they pay. Before the Tax Cuts and Jobs Act of 2017, there weren’t as many restrictions in place on either of these categories of expenses. That changed once that law was passed, though.

Today, homeowners can write off up to $750,000 of their mortgage interest on their annual taxes if you are a married couple who files jointly or if you’re a single tax filer. Couples who are married but file separately can deduct up to $375,000 in mortgage interest each.

As for property taxes, you can deduct as much as $10,000 on your annual taxes. That total reduces to $5,000 for single filers or married couples who file their taxes separately.

Plan Home Improvements Strategically

Some home improvements can be written off on your annual taxes. The Internal Revenue Service says only “necessary” improvements can be written off. That definition is rather vague, so you should consult with a tax professional if you have any questions.

Some improvements that are likely to qualify include fixtures such as railings or widening a doorway to make your home accessible. What is not likely to qualify is upgrading your kitchen that functions just fine now but isn’t up to your standards.

Go Energy Efficient

Making energy-efficient improvements to your home can be beneficial for a number of reasons. For one, they help curb climate change by requiring less energy to run. In addition, they are significantly cheaper to operate, meaning you will likely pay less on your monthly energy bills.

In addition to that, the IRS provides tax incentives to homeowners who make energy-efficient improvements to their home. For example, if you install solar panels on your home, you can qualify for a tax credit of up to 22% of their cost. 

You can likely also get tax credits for other energy-efficient improvements, including the installation of a new furnace, hot water heater, air conditioner, and potentially even a new roof.

Capitalize on Your Home Office

Depending on your situation, you could benefit from writing off expenses related to a home office. Many people were forced to work from home during the pandemic, and they likely racked up some extra expenses as a result. Some of these expenses can be written off on your taxes.

Not everyone who works from home will qualify for tax deductions, though. Those who are on a W2 payroll from their job are unlikely to qualify. 

However, people who are considered independent contractors or who work for themselves can realize tax benefits by writing off part of their home internet and phone, energy bill, and even potentially a portion of their mortgage.

Consult with a tax professional so you can understand which of these benefits you might qualify for, and how you can take advantage.

Understand Capital Gains if You’re Selling

When you sell a home, you could potentially be forced to pay capital gains taxes on the profit you realized. But, there are ways that you can avoid having to pay what could amount to a rather costly tax bill.

The IRS says that, as long as you lived in your home as the primary residence in two out of the last five years before you sold the home, you don’t have to pay capital gains taxes. 

Married couples who file their taxes jointly have no tax obligation on the first $500,000 of capital gains from the sale of a home. That number drops to $250,000 for a single filer or for a married couple who files their taxes separately. 

That’s a significant tax break. So, if you’re planning to use a home as an income property, consider living in it for a period of time before you sell. Even if you were to live in it for the first two years, and then rent it for the next three before you sell, you could be saving yourself a lot of money.

Save Money with Great Homeowners Insurance

These are just some of the tax strategies that homeowners can take to reduce their tax liability and realize financial benefits from owning their home. It’s always a good idea to consult with a tax professional if you have any questions about these tax strategies or any others. They will be able to walk you through all the specifics.

Another great way to save money as a homeowner is to get a homeowners insurance plan from a reputable insurance company. Signature Insurance has been protecting homeowners like yourself in Michigan for years.

Our team of experts is constantly working to educate homeowners on ways they can save money while protecting their most important asset — their home. 

Contact us today to find out how we can help you, and to get a free quote.