2021 Deductions and Exclusions Relating to Your Primary Residence

Home Office Expenses: For employees, expenses relating to working from home are not deductible. The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the deductibility of such expenses when it suspended the deduction for miscellaneous itemized expenses that was available before 2018. However, for self-employed individuals, tax deductions are still available. Because individuals are limited to a maximum $10,000 deduction for state income and property taxes, allocating a portion of these tax expenses to the portion of a taxpayer’s home used for business, can increase deductions for these amounts that would otherwise be lost. 

Mortgage Interest Deduction: For clients who sold a principal residence during the year and acquired a new principal residence, the mortgage interest deduction may be limited. For mortgages of more than $750,000 obtained after December 14, 2017, the deduction is limited to the portion of the interest allocable to $750,000 ($375,000 in the case of married clients filing separately). For a mortgage on a principal residence acquired before December 15, 2017, the limitation applies to mortgages of $1,000,000 ($500,000 in the case of married clients filing separately) or less. However, for clients operating a business from home, an allocable portion of the mortgage interest is not subject to these limitations. 

Deductions for Interest on Home Equity Debt: Interest on home equity debt may be deductible where a client used that debt to buy, build, or substantially improve his or her home. For example, interest on a home equity loan used to build an addition is typically deductible, while interest on the same loan used to pay personal expenses, such as credit card debt, is not. Thus, it’s important to document the portion of the debt for which an interest deduction is taken. 

Gain or Loss on the Sale of a Home: If a client sold his or her home this year, up to $250,000 ($500,000 for married filing jointly) of the gain on the sale is excludible from income. However, this amount is reduced if part of the home was rented out or used for business purposes. Generally, a loss on the sale of a home is not deductible. But again, if a portion of the home was rented or was otherwise used for business, the loss attributable to that portion of the home is deductible. 

Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness: Under Code Sec. 108(a)(1)(E), gross income does not include the discharge of indebtedness of a taxpayer if the debt discharged is qualified principal residence indebtedness and is discharged before January 1, 2026. 

Treatment of Mortgage Insurance Premiums as Qualified Residence Interest: Under Code Sec. 163(h)(3)(E), clients can treat amounts paid during 2021 for qualified mortgage insurance as qualified residence interest. The insurance must be in connection with acquisition debt for a qualified residence.  

If you have any questions about your home tax deductions call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC prepares tax returns year round.