How to Prepare Your Home Tax Deductions

learn about home tax deductions

How to Prepare Your Home Tax Deductions

(Last Updated On: August 16, 2018)

The tax code helps promote homeownership. With tax time is around the corner homeowners should be eagerly looking into home tax deductions.

Why?

Although the recent changes in the tax code impact homeowners, overall, the code still helps homeowners.

In fact, according to Robert Moss, the national director for government affairs at CohnReznick (an accounting and tax advisory firm):

“(The code) is completely skewed [towards homeowners]. There is not a direct way in the code to get a direct tax benefit from renting.”

Overall, from state to federal regulations, homeowners maintain dozens of home tax deductions.

Changes in Home Tax Deductions

The Tax Cuts and Jobs Act (TCJA) impacted two important homeowner tax breaks.

home tax deductions change annually

First, the new tax law introduced limits on state and local taxes, which includes real estate property taxes. Previously, homeowners could claim an itemized deduction for an unlimited amount of personal (non-business) state and local income and property taxes.

For example, homeowners that itemized deductions could deduct a large property tax bill. Also, individuals with large personal state and local income tax obligations could deduct the entire amount through itemization. Additionally, individuals with big personal state and local income tax bills could fully deduct those as well.

However, change impact home taxes by limiting itemized deductions for personal state and local property taxes, along with personal state and local income taxes. The deductions limit homeowners to itemize up to a combined total of only $10,000 ($5,000 if you use married filing separate status).

For homeowners in high property tax jurisdictions, the changes directly impact them. Individuals in these categories may only deduct a maximum $10,000 of personal state and local property taxes.

Additionally, the tax law changed some other areas as well. According to the National Association of Realtors, homeowner should note the following impact on home tax deductions.

Mortgage Interest Deduction

“The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after December 14, 2017. Additionally, current loans of up to $1 million remain grandfathered and not subject to the new $750,000 cap. Neither limit is indexed for inflation. However, homeowners may refinance mortgage debts existing on December 14, 2017 up to $1 million and still deduct the interest, pending the new loan does not exceed the amount of the mortgage being refinanced. The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence. Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.”

Exclusion of Gain on Sale of a Principal Residence

“The final bill retains current law. A significant victory in the final bill that NAR achieved. The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.”

Home Improvement Deductions

In addition to itemization and property taxes, home improvement tax deductions remain impactful.

common home tax deductions

Home Improvement Loans

Many home improvement projects are quite costly and homeowners take out a loan to complete the work. A real estate tax attorney details the applicable loan type.

“A qualifying loan is one that is taken out to add “capital improvements” to your home, meaning the improvement must increase your home’s value, adapt it to new uses, or extend its life.”

Examples of capital improvements include adding a bedroom or garage. Plus, installing insulation or updating landscaping provide other capital improvements.

Tax experts also point out that qualifying loans do not apply to basic repairs and fixes. First, distinguish between these two types of work because only the interest on loans taken out for home improvements remains deductible from your income taxes.

Energy Efficiency Upgrades

The largest home improvement tax deduction applicable to energy efficiency is the Renewable Energy Efficiency Property Credit. This credit allows homeowners to deduct up to 30% of the cost of equipment and installation. Jayson Mullin, founder of Top Tax Defenders, explains the benefits:

“You could save up to 30% of the total cost of installing certain renewable energy sources in your home. The 30% credit applies to the cost, including labor and installation, and must be taken in the year the item was placed in service.”

Separately, there are other programs that help reduce the cost of making energy efficient home improvements. While they may not impact your home improvement tax deductions, they will contribute to saving money over time.

For example, home energy checkups identify inefficient areas in the home and provides recommendations to address the issues. At SolvIt, our checkups focus on the following:

  • Provide a Whole-House Energy Assessment
  • Improve Energy Efficiency
  • Reduce Energy Usage
  • Lower Monthly Utility Costs

Plus, as an EnergizeCT certified contractor, our checkups are completed as part of the Home Energy Solution Program.

Business-Related Deductions

Many people work from home and many people have a home office. The home office tax deduction is a great way to depreciate the home improvement cost for people with a home business. For people that qualify, 100% of home office improvements remains deductible as a business expense.

For example, if you use a bedroom in your home as a home office and pay a carpenter to install built-in bookshelves, the you may depreciate the entire cost of the project.

However, for any improvements that benefit the entire home, then the corresponding deduction requires pro rata treatment. For example, if you use 20% of your home as an office, you may depreciate 20% of the cost to upgrade your home heating and air conditioning system.

State of Connecticut Tax Deductions

As a homeowner in Connecticut, there are a few home tax deductions and other financial incentives provided to state residents. In general, most tax deductions relate to energy efficiency.

home tax deductions & other tax savings opportunities from the state of connecticut

Renewable Energy Systems Property Tax Exemption

For any commercial, multi-family or residential property, Connecticut provides a property tax exemption for “Class I” renewable energy systems that generate electricity for private residential use. The exemption remains available for systems installed on or after October 1, 2007, that serve single-family homes or multi-family dwellings limited to four units.

In addition, “any passive or active solar water or space heating system or geothermal energy resource” is exempt from property taxes, regardless of the type of facility the system serves.

An exemption claim must be filed with the assessor or board of assessors in the town in which the property resides on or before the first day of November in the applicable assessment year. Contact your local tax assessor’s office for more information.

Energy Efficiency Upgrade Financing

As part of the Connecticut Housing Investment Fund Inc. customers of Connecticut Light and Power Company (CL&P) and United Illuminating Company (UI) may apply for financing for eligible energy efficiency upgrades through the Home Energy Solutions Program.

Eligible homes include single- and two-family homes and condos as well as vacation (second) homes. The program offers loan amounts up to $25,000 for energy efficient upgrades. Eligible upgrades include items, such as:

  • water heaters
  • furnaces
  • boilers
  • heat pumps
  • air conditioners
  • caulking or weather-stripping
  • air and duct sealing
  • windows
  • siding
  • roofs and more.

For more information refer to the program’s website.

For any home improvement projects that require plumbing, electric, HVAC needs, then SolvIt is happy to help. We leverage our relationships with utility companies to help process available rebates. Plus, we offer financing that helps homeowners make necessary improvements! If there are any questions, please let us know.

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