POV: You’ve recently closed on your first home (Congratulations!). For as long as you can remember, people have told you that once you own a home, you’ll want to itemize deductions versus taking the standard deduction. You don’t know which receipts to save, or which purchases to track, so you’re stuffing them all in a shoebox or in a file cabinet in your basement. If this sounds like you, you’re not alone. Let’s talk through how homeownership impacts your taxes. For the purposes of this blog, we’ll assume that this is your primary residence.
According to the IRS, your home could be a house, condo, cooperative apartment, houseboat, mobile home or even a house trailer (so long as it contains a sleeping space, toilet, and cooking facilities).
HERE’S WHAT YOU CAN DEDUCT:
As a homeowner of a single-family residence, you’re able to deduct:
Home mortgage interest (within allowable limits)
Property taxes (which are included in state and local taxes) – in total, the deduction is limited to a $10,000 limit. This deduction is further limited (to $5,000) if your filing status is married filing separately.
Mortgage insurance premiums (but as of October 2022, this deduction was only extended through 2021)
In order to deduct these homeownership expenses, you must itemize deductions versus taking the standard deduction. You can only itemize OR take the standard deduction, so generally speaking, you should elect to take the higher of the two deductions since the goal is to reduce your taxable income by as much as possible in order to reduce your tax bill.
Pro Tip: To maximize the itemized deduction, be sure to provide your accountant with your HUD-1 statement which was provided to you at closing, which will show if you prepaid any property taxes as part of your settlement costs.This is only necessary for the 1st year you’re filing your taxes as a new homeowner. If you have not yet reached the $10,000 Federal state and local tax limit, these additional taxes can increase the itemized deduction. Furthermore, if you’re in a state like NJ, the property tax deduction limit is $15,000, so you want to maximize the deduction there as well.
HERE’S WHAT YOU CAN NOT DEDUCT:
Now that we’ve covered what is tax-deductible, let’s look at what can’t be deducted:
Forfeited down payments, deposits, or earnest money
Insurance, like homeowner’s insurance, hazard insurance, comprehensive coverage, fire coverage, title insurance, etc.
Utilities, like electricity, gas, water, sewer, security, internet, etc.
Homeowners’ association (HOA) fees, condo association fees, common charges, etc.
Settlement and closing costs (excluding prepaid interest and prepaid property taxes)
Money paid for the cleaning and maintenance of your home
HERE’S WHAT YOU SHOULD KEEP TRACK OF EVEN THOUGH YOU CAN’T DEDUCT IT:
Although improvements to your primary residence are not tax-deductible and cannot be depreciated, you’ll still want to track these expenses. In the event you sell your home or convert it from personal use to rental use, basis adjustments may be necessary. If you sell your home, these basis adjustments will be helpful in reducing any potential taxable gain on the sale. If you convert the home from personal to rental use, the basis that will be used for depreciation will be the lesser of the fair market value or the adjusted basis on the date that it’s converted.
Here are some fees and improvements that can be used to adjust your basis:
Settlement fees and closing costs such as
Charges for installing utility services
Legal fees (including fees for the title search and preparing the sales contract and deed)
Transfer or stamp taxes
Owner’s title insurance
Costs owed by the seller that you paid (as long as the seller doesn’t reimburse you) such as real estate taxes owed up to the day before the sale date, back interest owed by the seller, seller’s title recording or mortgage fees, charges for improvements or repairs that are the seller’s responsibility, and sales commissions.
Improvements, such as:
Additions (i.e. bedroom, bathroom, deck, garage, porch and patio)
Lawn & Grounds (i.e. landscaping, driveway, walkway, fence, retaining wall, and swimming pool)
Exterior Improvements (i.e. storm windows/doors), new roof, new siding and satellite dish
Insulation (i.e. in the attic, walls, floors and pipes/duct work)
System Improvements (i.e. heating system, central air conditioning, furnace, duct work, central humidifier, central vacuum, air/water filtration systems, wiring, security system and lawn sprinkler system)
Plumbing Improvements (i.e. septic system, water heater, soft water system, and filtration system)
Interior Improvements (i.e. Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, and fireplace)
Repairs done as part of a larger project
Pro Tip: Start a Google Sheet, or spreadsheet where you can track the date of the improvement, the vendor/contractor who completed it, and the amount you paid. You should also add a column to track if these improvements are later replaced/removed, because improvement costs that are no longer part of your home at the time of sale or conversion, can’t be included in your basis. I also strongly suggest scanning a copy of the receipt and saving that as well.
Reminder: Repairs and maintenance costs that are necessary to keep your home in good condition, but don’t add to its value or prolong its life, cannot be included in your basis. This includes improvements with a life expectancy, when installed, of less than 1 year. You can still track them for your own purposes of keeping contact info of great contractors, but just know these expenses won’t have any impact on your basis calculation.
We hope this makes your homeownership journey less taxing and more relaxing. Of course, if you have any questions about how your home purchase will impact your taxes, please reach out. We’re happy to help. Congrats, homeowner!