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This article is for general educational purposes only. I’m not a tax professional, and tax laws and individual circumstances can vary. Always consult a qualified tax professional about your specific situation.
Did you know that owning a home can come with some tax benefits? While not every expense related to your home is deductible, there are several costs homeowners may be able to claim—and some expenses you’ll want to keep track of because they could reduce your taxable gain when you eventually sell.
Here are a few things every homeowner should know.
Buying a Home: Some Costs May Qualify
When you purchase a primary residence, certain expenses may have tax implications. Depending on your circumstances, these can include:
- Mortgage interest, including certain prepaid interest or points
- Property taxes
- Certain mortgage insurance premiums, when applicable
- Some recording or title-related fees, depending on what the expense is for
It’s important to remember that not every closing cost is tax deductible. For example, appraisal fees, title insurance, and other settlement costs may instead become part of the home’s cost basis rather than providing an immediate deduction.
That’s one reason it’s a good idea to keep a copy of your closing statement and other purchase documents.
Your Biggest Annual Deduction: Mortgage Interest and Property Taxes
For many homeowners, the most familiar potential deductions are mortgage interest and property taxes.
Whether you can deduct these expenses, and how much you can deduct, depends on your individual tax situation and current tax law. Your tax professional can help you determine which expenses apply to you.
And remember, expenses such as homeowners insurance, utilities and routine maintenance generally aren’t deductible for a personal residence.
Selling Your Home? Keep Those Receipts!
Selling a home comes with expenses, too. Certain costs associated with selling can reduce the amount you realize from the sale when determining your taxable gain.
Depending on the circumstances, these may include:
- Real estate commissions
- Certain legal fees
- Certain title and escrow expenses
- Staging and other selling expenses
Your tax professional can help you determine which selling expenses qualify and how they should be reported.
What About Capital Gains?
This is where keeping good records can really pay off.
If you sell your home for more than your adjusted cost basis, you may have a capital gain. Your cost basis generally starts with what you paid for the home and can be adjusted for certain qualifying costs and improvements.
For example, if you purchased your home for $400,000 and later sell it for $650,000, that doesn’t necessarily mean your taxable gain is $250,000. Certain selling expenses and qualifying improvements may affect the calculation.
Home Improvements Can Increase Your Cost Basis
This is one of the biggest reasons I recommend keeping your receipts and records for major home improvements.
Generally, improvements that add value to your home, prolong its useful life or adapt it to a new use may be added to your home’s cost basis.
Examples can include:
Major additions and outdoor improvements
- Adding a bedroom or bathroom
- Building a deck, garage, porch or patio
- Landscaping
- Installing a driveway or walkway
- Adding a fence or retaining wall
- Installing a swimming pool
Major systems
- New heating system
- Central air conditioning
- Furnace
- Ductwork
- Central humidifier
- Security system
- Sprinkler system
- Plumbing or electrical improvements
- Water heater
- Filtration systems
Exterior improvements
- New roof
- New siding
- Insulation
- Storm windows or doors
Interior improvements
- Kitchen modernization
- New flooring
- Built-in appliances
- Fireplace
- Wall-to-wall carpeting
For example, we’ve made several major improvements to our home over the years, including new flooring, a new roof, and a new furnace and A/C. When we eventually sell, qualifying improvements like these may be included in our adjusted cost basis.
So keep those receipts!
Not Everything Counts as an Improvement
Routine repairs and maintenance generally don’t increase your cost basis.
Things such as painting, fixing a leak, filling holes or cracks, or replacing broken hardware typically fall into the category of repairs and maintenance rather than capital improvements.
There can be exceptions, particularly when repair work is completed as part of a larger remodeling or restoration project, so this is another area where keeping your records and talking with a tax professional is important.
The Home Sale Exclusion
The good news for many homeowners is that federal tax law provides a potential exclusion for gains from the sale of a primary residence.
Generally, if you meet certain requirements, you may be able to exclude up to $250,000 of gain if you’re single or $500,000 if you’re married filing jointly.
One of the key requirements is generally that you have owned and lived in the home as your primary residence for at least two of the five years before the sale. There are additional rules and exceptions, so don’t assume you automatically qualify based on these requirements alone.
This exclusion can make a significant difference when you’re selling a home that has appreciated substantially in value.
The Bottom Line: Keep Your Records
Homeownership comes with plenty of expenses, but some can provide tax benefits while others can become important when calculating your gain when you sell.
My biggest piece of advice?
Keep your paperwork.
Save your purchase documents, closing statements, receipts for major improvements, and records of significant work done to the property. You may not need all of them today, but years from now, those records could be very valuable.
Ultimately, when it comes to taxes, don’t rely solely on your Realtor for answers. A qualified tax professional can look at your complete financial situation and tell you what applies to you.
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