Here are some tips from tax advisers to help maximize home-related deductions. Be sure to consult a tax expert for specifics on your home and mortgage.
A matter of interest. The biggest deduction is typically interest paid on up to $1 million of debt used for its purchase, construction or improvement, as well as an additional $100,000 in debt applied to purchase or in the form of home-equity loans or lines of credit.
Home office do’s and don’t’s. The home-office deduction has a reputation as a notorious audit trigger, but avoiding one often comes down to being reasonable in your deductions.
A simpler method of estimating home-office expenses, enacted in 2013, allows homeowners to deduct $5 per square foot of home-office space, but the entire deduction is limited to $1,500, Mr. Green says.
Rent and save. With the convenience of Airbnb and other vacation-accommodation services, more people are generating income from short-term rentals, Ms. Canning says. Part-time landlords often miss whole-house expenses for which a share could be prorated to the number of days of rental use, such as Wi-Fi, pool maintenance and outdoor furnishings, she adds.
Part-time landlords need to remember that if they rent for more than 14 days, that income must be reported and may be taxable. Save your receipts.
Energy credits. Congress extended through 2016 some home-related energy credits that were set to expire in 2015. These credits, such as for installing new windows or an energy-efficient roof, don’t add up to much savings for a high-end home because they are limited in amount for each improvement category to $500 ($200 for window improvements) for all years since 2006, even if you have changed homes. Newer homeowners, however, may not have reached the limit and could benefit from the credits, Mr. Green says.
Charitable documentation. Donated real estate is an IRS audit red flag, so be sure and get a qualified appraisal for any real estate valued at more than $5,000 before you give, Mr. Green says. Using property assessments, which are values assigned by local governments for tax purposes, is not allowed, and if the property value exceeds $500,000, the qualified appraisal must be attached to the tax return, he adds.
Refi, renovate, deduct. If a portion of the refinanced-mortgage proceeds is put toward home improvements, the points related to the home improvement amount may be deducted in the tax year of the refinance, assuming the amount falls below the $100,000 deduction limit and that other IRS requirements have been met.