As home values steadily increase annually, more Millenials are realizing the American dream of home ownership. This also means millenial taxpayers can benefit from the Office in Home tax deduction.
If you’re among the new property owners, I’ve got good news and bad news. The bad news? You now bear the burden of painting, plumbing and yard-work. The good news? You now enjoy big-time tax breaks on April 15th. You’ll probably enjoy tax breaks even when you sell your residence.
But to take full tax advantage of your home, your taxes will likely get more complicated. In ‘tax-speak’, you’re not living on “EZ” street anymore; you’ve moved to Form 1040 and Schedule A, where you’ll have to “itemize” your deductions.
Here’s a look at
- homeowner expenses you can deduct on Schedule A,
- ones you can’t and
- some tips to get the most tax advantages out of your new property-owning status.
Your biggest tax break is reflected in the house payment you make each month, since most of which goes toward interest in the early years. And all that interest is deductible.
But the tax deduction for mortgage Interest doesn’t end with your home’s first mortgage. If you later pull out extra cash through refinancing, get a home equity loan, or take out a line of credit, the interest on those equity debts of $100,000 or less are fully deductible.
If you own more than one property, the interest on a second home also is fully deductible. In fact, your additional property doesn’t have to strictly be a house. It could an RV. Or it could be a boat; it simply has to have cooking, sleeping and bathroom facilities.
Did you pay “points” to get a better rate on your mortgage? They offer a tax break, too. The only issue is exactly when you get to claim them.
- The IRS lets you deduct points in the year you paid them if, among other things, the loan is to purchase or build your main home.
- If you refinance your home, and pay points to do so, the points must be deducted over the life of the loan, not in the year you paid them.
The same rule applies to home equity loans or lines of credit.
Often referred to as “real estate taxes,” property taxes are paid out to your city’s Commissioner of Revenue, either directly by you or by your mortgage lender as part of your monthly mortgage payment These tax payments are fully deductible from your income on your Individual Form 1040 tax return.
Home Office Expenses
- If you’re self-employed, or paid on a 1099 basis, and use a portion of your home ‘exclusively’ and ‘regularly’ for storage or office use associated with your business, you can convert a portion of your home ownership costs, including utilities, insurance, maintenance and repairs, as a business expense.
- The area doesn’t have to be a full room; it can be a portion of a room. Just take the square footage of the area used for business, and divide it by the square footage of the entire residence. Then apply that percentage to what you paid out in utilities, carpet cleaning, lawn service, repairs, and so on, and take it as a deduction on Form 8829 of your 1040 tax return.
- You can even deduct these costs as a W-2 employee, as long as the office space you maintain at home is for the convenience of your employer. In other words, you’re working from home not as a convenience to you, but because your employer doesn’t provide space for you to work at the company’s local office.