Filing taxes as a homeowner can get complicated, especially when you are dealing with rules that depend on how you use your home, what records you keep, and whether you sold the property.
This article covers several common homeowner tax mistakes tied to home office deductions, recordkeeping for improvements, home-sale gains, and property tax timing. Because tax outcomes depend on your specific situation, use this as general educational information and verify details with a qualified tax professional before you file.
A common mistake is claiming a home office deduction without first confirming that you qualify, or using a calculation method without understanding how it works. Home office eligibility depends on meeting IRS rules for exclusive and regular business use, and the method you choose can affect both your current deduction and what happens later if you sell the home.
Some homeowners use the simplified option, which is based on square footage and is capped at $1,500 ($5 per square foot for up to 300 square feet). That method does not allow home depreciation for the years it is used, which also means there is no later depreciation recapture for those same years. Others use the regular method, which may involve a larger deduction in some cases but requires more detailed calculations and includes depreciation. If depreciation is claimed under the regular method, that depreciation generally must be recaptured when you eventually sell your home, even if you otherwise qualify for the Section 121 home sale exclusion.
The mistake is not just math. It is claiming or calculating a deduction for your home office without understanding the qualification rules, recordkeeping requirements, and possible sale-related implications.
Poor recordkeeping can create problems long after the year you spend the money. The main tax issue is not just forgetting receipts. It is failing to separate routine expenses from capital improvements that may matter later if you sell the home.
In general, regular repairs and maintenance that keep your home in good condition do not increase your tax basis. By contrast, costs for qualifying improvements that add value, prolong the home’s life, or adapt it to new uses may increase basis and potentially reduce taxable gain on a future sale. Repairs that are done as part of a larger remodeling project are generally treated as part of the improvement.
That is why it helps to keep organized records for home maintenance, repair work, and larger property improvements. The mistake homeowners make is mixing categories or failing to document what was actually done and when.
Another common mistake is assuming that profit from selling a primary residence is either always taxable or always fully excluded. In reality, the tax treatment depends on whether you meet the IRS ownership and use tests and how much gain you have.
If you qualify under Section 121, you may be able to exclude up to $250,000 of gain from the sale of your main home, or up to $500,000 if you are married filing jointly. Gain above the applicable exclusion amount may be taxable and generally must be reported. For example, if you bought a home for $150,000 and sold it for $300,000, the gain is $150,000 before applying any available exclusion and any basis adjustments.
The mistake is treating every home sale the same. Before you assume you owe tax—or assume you do not—review whether the property was your main home, whether you meet the eligibility tests, and whether your records support your basis.
Property tax timing can also trip homeowners up. The key concept is generally the year paid, not just the year shown on the bill. A lot of people confuse the amount billed, the amount they deposited into escrow, and the amount that was actually paid to the taxing authority.
If you pay property taxes directly, the deductible amount is generally what you actually paid during the calendar year. If your lender collects money through escrow, you can deduct only the real estate taxes the lender actually paid from escrow to the taxing authority during that year—not the full amount you deposited into the escrow account. Taxes paid at settlement or closing may also count in the year paid.
Because of that, do not rely only on the bill amount or your escrow deposits. Check what was actually paid before you claim the tax deduction for the year.
Some homeowner tax questions are worth escalating before you file. It may make sense to confirm details with a CPA, EA, or other qualified tax professional if you claimed a home office deduction, sold a home recently, completed major improvements, have mixed personal and business use of the property, or are unsure which expenses are deductible versus which ones affect basis.
A quick review can help you avoid filing with the wrong assumptions.
These are just a few of the common mistakes that homeowners can make when filing their taxes. Avoiding these mistakes will help you report things more accurately and reduce the chance of problems with the IRS. Also, please double-check all of these suggestions with a qualified, licensed tax preparer in your area.
Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We currently lend in all of Washington, Oregon, Idaho, and Colorado. We offer a wide variety of mortgage programs & products with flexible qualification criteria since 1992. Please contact us if you have mortgage-related questions.
Common homeowner tax mistakes include miscalculating a home office deduction, failing to keep records for improvements, assuming every home sale is either fully taxable or fully excluded, and deducting property taxes in the wrong year.
The biggest mistakes are claiming the deduction without meeting the IRS rules for exclusive and regular business use, choosing a calculation method without understanding it, and overlooking the recordkeeping and home-sale implications tied to depreciation under the regular method.
It can. If the regular method is used and depreciation is claimed, that depreciation generally must be recaptured when the home is sold, even if the seller otherwise qualifies for the Section 121 home sale exclusion. Under the simplified method, no home depreciation is allowed for those years, so there is no later depreciation recapture for those same years.
Homeowners should keep organized records showing what work was done, when it was done, and how much it cost. It is especially important to document capital improvements because qualifying improvements may increase tax basis and potentially reduce taxable gain on a future sale.
In general, routine repairs and maintenance that keep a home in good condition do not increase tax basis. Qualifying improvements that add value, prolong the home’s life, or adapt it to new uses may increase basis. Repairs completed as part of a larger remodeling project are generally treated as part of the improvement.
No. If the IRS ownership and use tests are met under Section 121, a homeowner may be able to exclude up to $250,000 of gain, or up to $500,000 for married couples filing jointly. Gain above the applicable exclusion amount may be taxable and generally must be reported.
The tax treatment depends on whether the property was the seller’s main home, whether the seller meets the IRS ownership and use tests, how much total gain exists, and whether the seller’s records support the adjusted basis.
Generally, property taxes are deducted in the year they are actually paid, not just the year shown on the bill. If taxes are paid directly, the deductible amount is what was paid during that calendar year.
No. When a lender collects property tax money through escrow, the deductible amount is generally the real estate taxes the lender actually paid from escrow to the taxing authority during that year, not the full amount deposited into the escrow account.
It can make sense to check with a qualified tax professional if a home office deduction was claimed, a home was sold recently, major improvements were completed, the property had mixed personal and business use, or there is uncertainty about which expenses are deductible versus which affect basis.
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