What deductions can Homeowners take for 2021 tax year?
Are you a homeowner or trying to purchase your first home? If your answer is yes, you may benefit from reading this post. There are several deductions homeowners can take to reduce their taxable income. However, the only way homeowners can write off their qualified expenses on their tax returns is if they itemize their qualified personal expenses. Itemizing your tax return would be beneficial if your qualified personal expenses exceed your Standard Deduction for your current filing status (Read prior post- “What personal expenses can you deduct on your 2021 tax return?” for your reference).
Homeowners can deduct the following expenses on their 2021 tax return:
Interest on the mortgage for your main home: You can deduct up to $750,000 in mortgage interest as a Single or Married Filing Jointly taxpayer, or $375,000 if you are Married Filing Separately. Your property can be a house, co-op, apartment, condo, mobile home, boat, or similar property.
Interest on the mortgage for a second home: You can deduct the interest paid on a second home if you use the second home as collateral for that mortgage. However, if the property is also partially rented, you must live in the home for more than 14 days or more than 10% of the days you rent it out (whichever is longer). Note that this deduction can only be taken for one second home.
Mortgage points: Points are a percentage paid upfront at closing when you take out a mortgage to lower your interest rate. To qualify for the deduction, taxpayers must pay the mortgage points directly to the lender. They can be deducted in the year they were paid or over the life of the loan.
Late payment charges on a mortgage payment: You can deduct late payment charges as home mortgage interest. However, you should avoid making late payments as doing so will lower your credit score.
Prepayment penalties: These are payments made towards the principal to lower the loan amount. Lenders may charge you for making these payments. If you pay a prepayment penalty during the year and it is not for a specific service or cost from your mortgage, you can deduct that as mortgage interest.
Interest on a home equity loan: A home equity loan is money you borrow against your home (either in a lump sum or a line of credit). To take the interest deduction, the loan must be used to “buy, build or substantially improve your home”.
Mortgage insurance premiums/ Private Mortgage Insurance: If your adjusted gross income (AGI) is less than $100,000 ($50,000 for married filing separately), mortgage insurance premiums are fully deductible. These are fees paid to the lender for putting less than 20% down on a home mortgage.
Property Taxes/ Real estate taxes: These are taxes you paid on your personal property and your home. They are calculated based on your home location and used mainly for services rendered by your town such as funding school districts and garbage pick-up. You can deduct u to $10,000 of property taxes if Married Filing Jointly, or $5,000 if Married Filing Separately or Single.
Allowable Medical Home Improvements: If you make any “necessary and permanent” home improvements to your home for any medical reason, they may be tax deductible. Always keep good records of any qualified improvements you write- off.
Capital Gains: If you owned your primary residence for at least 5 years and lived in it for the last 2 out of the 5 years, you may be able to exclude any gains when you sell your home. You can exclude up to $500,000 (Married Filing Jointly) in capital gains, or $250,000 (Married Filing Separately or Single)
Source (s):
1. IRS.GOV (Instructions For Schedule A (Form 1040)).
2. Lauren Nowacki. “The Mortgage Interest Deduction 2021: A guide To Limits and What Qualifies”. RocketMortgage.com.11/19/21.
3. Sarah Sharkey. “8 Tax Deductions for Homeowners: Your Breaks and Benefits.” RocketMortgage.com.12/09/21.
