Reap Tax Windfall From Your Home

As Dorothy said in the classic film The Wizard of Oz, “there’s no place like home.”

Don’t sleep on the tax breaks associated with home ownership. Not only can you benefit while you are living there, you can reap a tax windfall when you finally sell the place.

Here are six ways to go over the rainbow.

  • Cash in on a home sale. Start with one of the biggest tax breaks on the books. If you meet certain requirements you can pocket hundreds of thousands of dollars from a home sale without paying a penny of federal income tax on your gain. Notably, you must have owned and used the home as your principal residence for at least two years during the five-year period ending on the sale date. The maximum exclusion is $250,000 for single filers and $500,000 for joint filers.

Tip: If you are forced to sell the home due to health reasons, an employment change, or other unforeseen circumstances, you may be in line for a partial exclusion.

  • Max out on property taxes. Prior to the Tax Cuts and Job Acts (TCJA), taxpayers could generally write off the full amount of property taxes paid on a principal residence if they itemized. But the TCJA limits the annual deduction for state and local tax (SALT) payments, including property taxes, to $10,000 for 2018 through 2025. Nevertheless, you still derive some tax benefits, especially if your other SALT payments are relatively low or nonexistent. There is no tax reward if you do not itemize.
  • Key in on mortgage interest. The TCJA also modified the deduction for qualified residence interest for 2018 through 2025. Previously, you could deduct interest on home acquisition debts up to $1 million, but the TCJA lowered the threshold to $750,000 (although debts for pre-December 16, 2017 loans are grandfathered). In addition, the deduction for interest paid on the first $100,000 of home equity debt is generally suspended for 2018-2025. However, if you take out a home equity loan and use the proceeds for a home improvement, it can potentially qualify as home acquisition debt, subject to the $750,000 limit when combined with other home acquisition debt. Voila! You may be able to deduct interest on the home equity loan, subject to the $750,000 limit on home acquisition debt.

Note: As with property taxes, you must itemize to benefit from this technique.

  • Prescribe a medical deduction. Itemizers may be in line for another tax break from home improvements. If you arrange an improvement for a medical reason (e.g., you install a pool to help alleviate a child’s asthma), the cost is added to your other deductible medical expenses (minus the increase in the value to our home). You should have a medical doctor’s note to support the expenditure as necessary. To qualify for an itemized medical expense deduction, your unreimbursed medical expenses must exceed 7.5% of your adjusted gross income (AGI). You can only deduct the excess.
  • Be a landlord. When you own a home used as a rental property, you are entitled to deduct depreciation, plus other expenses related to the rental like insurance, repairs, property taxes, mortgage interest, etc. These deductions can help offset tax on the rental income. Note, however, that special rules apply to a “vacation home” you rent to others and use personally. If your personal use exceeds the greater of 14 days or 10% of the days the home is rented out, you cannot claim a rental tax loss for the year.
  • Do your homework. If you are self-employed and use part of your home for business purposes, you may be eligible for home office deductions. To qualify, you must use the office regularly and exclusively as your principal place of business or a place where you meet or deal with clients, patients, or customers in the normal course of business. Assuming you meet this test, you can write off the allocable portion of expenses like utilities, insurance, and repairs, as well as the expenses directly attributable to the home office.

Small Business Tax Strategies
August 2020