How Does Buying a Home Affect My Tax Return?
When you put the deposit down on your first home, you’ll likely be feeling very excited and ready for the newest chapter of your life. There’s a lot of extra information you have to learn as a new homeowner, so it’s essential to ask these questions before purchasing a home. One thing that new homeowners tend to forget to research is how your tax return changes once you’ve got the keys to your new place.
You can potentially deduct your mortgage interest
If your mortgage is under $750,000, the interest that you pay is considered a tax deduction. The deductible interest makes a significant impact when it comes to tax time. Before 2017, the limit was $1,000,000, but since the Tax Cuts and Jobs Act came into play, it has lowered the limit. These tax deductions can be a significant deciding factor in the argument for renting a property versus buying a house.
Property taxes are deductible
$10,000 of your property taxes are deductible under the Tax Cuts and Jobs Act. Depending on where you pay your taxes, you may have the amount automatically added to your IRS forms, or you may require proof of payment to claim them.
Home renovations are deductible
Many homebuyers choose older homes with plans to upgrade and renovate them to look like the dream home they envision. Remodelling your kitchen or adding a mother-in-law suite is be considered deductible. Save all your receipts for any renovations, HVAC fixes, upgrades, landscaping, and other improvements. When it comes time to sell your home, you can add up the extra value you’ve added to the house, and any profits you make on the sale is tax-free. Energy-efficient upgrades are also beneficial when tax time comes. Not only are these upgrades useful for your wallet, but they’re also great for your home and the environment. Solar energy equipment is deductible until 2021. If you’ve already had equipment installed between 2017 and December 2021, you may be eligible for between 30% and 22% of the cost.
Your home office is deductible
Many of us have moved to remote workplaces, and it’s likely going to be more common in the future. For those who work part-time side hustles or have a full-time remote position, the space in your home used for your office and expenses related to it can be deductible. You will receive a dollar amount per square foot, up to 300 square feet. The maximum deduction for a home office is $1,500. There are strict guidelines for claiming this, so working with a professional tax expert is recommended.
Other deductions related to homeownership include locational, points, insurance, and ageing in place. Locational tax breaks are dependant on the state you reside in and can be up to $10,000, so it’s worth asking your accountant if you qualify. Points are when you pay a designated percentage of your total mortgage to your lender to reduce the amount of interest on the loan, and these may be deductible. Insurance is required when you purchase a home, and these payments may be tax-deductible, depending on your gross income. Aging in place means that homeowners stay in their homes until they require long-term care or assistance. In some cases, the cost of care, additional home upgrades to make life easier, or renovations can be deductible.
There’s so much to know about taxes, and many benefits often go unused because new homeowners are often unaware. Hiring a professional accountant or tax expert is a beneficial choice, especially your first year as a homeowner.