Buying a home is a significant financial decision for most people, and it comes with a lot of costs. However, many of these costs can be deducted from your income taxes, reducing your taxable income and lowering your tax bill. California has specific rules and regulations for tax deductions related to buying a home, so it’s important to understand what’s deductible and what’s not. In this blog post, we’ll explore What’s Deductible When Buying a Home in California.
The list and information contained in this article are not meant to be inclusive or exclusive of all deductible items. The personnel at Tholco Real Estate Group including but not limited to staff, management, etc are not tax professionals or advisors. It’s advisable and highly recommended that anyone purchasing or interested in purchasing or selling real estate consult a tax professional with questions and advice.
One of the most significant deductions for homeowners is mortgage interest. In California, you can deduct the interest on up to $750,000 of mortgage debt if you’re married filing jointly, or $375,000 if you’re single or married filing separately. This deduction applies to both primary and secondary homes, as long as you’re using the property as your residence.
It’s important to note that the mortgage interest deduction only applies to the interest on your mortgage, not the principal. So, if your monthly mortgage payment is $2,000 and $1,500 of that is interest, you can deduct the $1,500 on your income taxes. The remaining $500, which is the principal, is not deductible.
In addition to mortgage interest, homeowners in California can also deduct their property taxes on their income taxes. The state allows you to deduct the full amount of your property taxes, without any limit. This includes both state and local property taxes, as long as the property is your primary residence.
Read on for more information on What’s Deductible When Buying a Home in California
Home Improvement Loans
If you’ve taken out a loan to make improvements to your home, you may be able to deduct the interest on that loan on your income taxes. This deduction applies to loans up to $100,000, and the improvements must be “substantial” and add value to your home. Examples of eligible improvements include adding a room, installing a new roof, or replacing your HVAC system.
When you take out a mortgage, your lender may charge you “points” as a fee for obtaining the loan. Points are a percentage of the loan amount, with one point equal to 1% of the loan. In California, you can deduct these points on your income taxes, as long as they’re paid upfront and not spread out over the life of the loan. If you paid points to refinance your mortgage, you can deduct those points over the life of the loan.
Mortgage Insurance Premiums
If you put less than 20% down on your home, your lender may require you to pay for mortgage insurance. This insurance protects the lender if you default on your loan. In California, you can deduct the cost of mortgage insurance premiums on your income taxes, as long as your adjusted gross income (AGI) is less than $100,000 if you’re married filing jointly, or $50,000 if you’re single or married filing separately. The deduction phases out completely if your AGI is more than $110,000 if you’re married filing jointly, or $55,000 if you’re single or married filing separately.
Energy-Efficient Home Improvements
If you’ve made energy-efficient improvements to your home, such as installing solar panels or upgrading your insulation, you may be eligible for a tax credit on your income taxes. The federal government offers a tax credit of 26% of the cost of the improvements, up to a maximum credit of $2,400 for solar panels. California also offers a state tax credit for certain energy-efficient improvements, such as solar water heaters and fuel cells.
Home Office Deduction
If you work from home, you may be able to deduct some of your home office expenses on your income taxes. To qualify, you must use your home office exclusively and regularly for your business. This means that your home office should be a separate area of your home that you use only for work, and not for personal use. The amount you can deduct depends on the size of your home office and the percentage of your home that it represents. You can deduct expenses such as rent, utilities, and insurance that are directly related to your home office.
When you buy a home, you’ll incur a variety of closing costs, such as appraisal fees, title insurance, and attorney fees. While these costs aren’t deductible as a whole, you may be able to deduct certain expenses, such as prepaid interest, property taxes, and mortgage insurance premiums. Be sure to ask your tax professional which closing costs are deductible, as the rules can vary depending on the circumstances of your purchase.
Home Equity Loans and Lines of Credit
If you take out a home equity loan or line of credit, the interest you pay on that loan may be deductible on your income taxes. However, there are certain restrictions on this deduction. For example, the loan must be secured by your primary or secondary home, and the interest deduction is limited to the interest on loans up to $100,000.
Buying a home can be a daunting and expensive process, but there are many tax deductions available to help offset the costs. California offers several deductions, including mortgage interest, property taxes, home improvement loans, points, mortgage insurance premiums, energy-efficient home improvements, home office deductions, and deductions for certain closing costs and home equity loans. Be sure to consult with a tax professional to make sure you’re taking advantage of all the deductions available to you. By understanding the tax benefits of homeownership, you can make an informed decision and save money on your income taxes.