Tax Cuts New Homeowners Should Know About
Purchasing a new home can be a daunting and expensive task for even the most prepared buyers. Once you get settled in, it’s easy to stress over the many expenses including renovations, high power bills, new furniture, lawn care, and homeowner association fees.
Although buying a home often comes with unforeseen expenses, it can also help lower the amount you owe come tax season. Check out these tax deductions that can save you money when April 15th rolls around:
Energy Efficient Property Credits
What’s good for both the earth and your bank account? The Residential Energy Efficient Property Credit, which can directly lower your tax bill and is applicable when using energy-efficient items such as solar panels, solar water heaters, wind energy, and geothermal heat pumps. This property credit offers 30 percent of the cost of installing these resources in your home. In the end, you don’t just save come tax season, but you also end up saving on energy bills in the long run.
Home Office Tax Deduction
If you’re a new homeowner who plans on working from home either in a home office, in-house hair salon, art studio, or even a repair shop in your garage, you may qualify for a home office tax deduction. This deduction allows a self-employed person to deduct the portion of their mortgage or rent going to a home office.
This is only applicable to homeowners who have a specific area designated primarily for conducting business. This means your office can’t double as the family room after working hours. In addition to mortgage and rent, utility expenses including phone and internet can also be deducted. See a full list of deductions for self-employed individuals in the 2016 Freelancer Tax Guide.
Mortgage Payment Interest Deduction
The mortgage payment interest deduction is one of the highest deductions for new homeowners because those with new mortgages pay more interest–therefore they’re able to receive a larger deduction. Mortgage interest applies to any interest you pay on the loan that you used to buy your home—whether that’s a new mortgage, line of credit, a home equity loan, or a second mortgage. In most cases, a large portion of your mortgage payment interest is tax deductible depending on the amount and date you took out the mortgage.
Home Equity Loan Deductions
Home equity loans can be great for consolidating debt, making home improvements, or even purchasing a second home. What many homeowners don’t know is that the interest on most home equity loans is in fact tax deductible based on these limitations:
- You can only apply the deduction to a first or second home if your primary residence is the home in which you resided most of the year. However, you can select each year which second home the deduction applies to (if you have more than two), giving you the best tax advantage.
- The limits on the deduction are higher for home improvements and purchasing a second home than if you are consolidating debt, which is only applicable to the first $100,000.
- The interest deduction for home equity loans used for home improvement cannot exceed one million dollars—including both the first and second home mortgages combined.
When homeowners receive tax deductions they’ll be moved to the tax Form 1040 and Schedule A. Sometimes filing for these deductions can be tricky and time-consuming but as a new homeowner it is important to try and save money where you can, so in the end, the extra work is worth it!