Tax season is upon us and you might want to buckle up. From pandemic-related relief, remote work or no work, you might find that preparing your 2020 taxes is a bigger challenge than usual. On the other hand, last year was an explosive year for the housing market in Arizona, so chances are you have a new property on your hands. While owning or buying a home is expensive, there are several tax deductions for homeowners that can help you recoup some of those costs.
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1. Mortgage Interest: This is by far the most popular and well-known write off. The mortgage tax deduction can be for interest paid on loans for no more than two residences. That could be any combination of a primary residence, second home, vacation home, or potentially even a boat, or recreational vehicle, provided there is plumbing and a bathroom. You can deduct interest on loans up to $750,000, but additional debt over that amount cannot be deducted.
2. Property Taxes: Being a homeowner means being able to deduct the property tax you pay. Keep in mind that the IRS caps property taxes at $10,000. Additionally, if a portion of your monthly mortgage payment goes into an escrow account, and periodically the lender pays your real estate taxes out of the account to the local government, don’t deduct the amount paid into the escrow account. Only deduct the amount actually paid out of the escrow account during the year to the taxing authority.
3. Home Office: We anticipate a lot of confusion around this particular write off because so many people started working from home last year. Unfortunately, the home office tax deduction is only for self-employed homeowners. If you are self-employed and use a room, or several rooms, exclusively for business, you should consider it.
4. Rental / Airbnb Property: Over the past few years, more people have turned their homes into a cash machine by renting rooms or the entire home to cover the mortgage or generate passive income. In addition, tax depreciation on those rental properties is a huge tax benefit.
5. Green amenities: There are a ton of tax deductions for making your home more energy efficient. Before taking on a green project, make sure to check the specific requirements and deadlines required to receive any potential tax breaks. Think of things like solar panels or drought tolerant landscaping, even rain barrels may qualify.
6. Tax break when you sell your home: Thanks to President Bill Clinton and the Taxpayer Relief Act of 1997, most homeowners will not owe any capital gains taxes on profits when selling their primary residence. The short version of the rule is that if you have lived in your primary residence two of the past five years, you can exclude up to $250,000 of profits from being taxed. If you are married, that number doubles to $500,000.
NOTE: BUYAZRE are not tax professionals. It’s always important to consult a CPA when making tax decisions pertaining to homeownership and luckily you still have plenty of time to do that.
Asher Cohen is the founder of BUYAZRE, a Scottsdale-based agency that has provided an unparalleled real estate experience to Valley residents for over 10 years.