Dont Miss These Tax Breaks for California Homeowners in 2023
If you own a home in California taxes can be a really big deal, particularly because the cost of homes is so high. In 2023, there are a variety of tax deductions and exemptions available that can help you reduce you overall tax burden. Children and property generally provide huge deduction each April, but since we are involved in real estate that will be our focus. We always recommend hiring a qualified and seasoned tax professional who knows the ins and outs of your particular city and state’s laws. So this is not to replace a proper tax consultation, but this is to help provide some questions you will want to ask your tax preparer or CPA.
Most people in California feel a high level of stress and frustration when it comes to taxes. Taxes are a major expense that can take a big chunk out of your income, and the laws surrounding them can be complex and difficult to understand. Nobody truly wants to pay taxes, though we do want to abide by the law. So know which the laws can help you save money and reduce the amount of stress you face each spring.
What to expect
- Understand how owning a home affect your taxes
- Know what deductions you can take as a homeowner
- Familiarize yourself with capital gains taxes if you’ve recently sold your home
- Determine whether or not it is beneficial to itemize your deductions as a homeowner
- Do you qualify for earned income tax credit
Learn the major tax benefits and liabilities of owning a home
Owning a home can be both a blessing and a burden when it comes to taxes. On one hand, there are great tax deductions you can take as a homeowner that will help reduce your overall tax burden. But on the other hand, depending on your city and county, there may be additional state and local taxes to consider. This makes it really important to understand how owning a home affects your taxes situation. This way you don’t miss out on any potential savings or end up paying more than necessary.
Three of the biggest things to know about taxes when owning a home are property taxes, deductions and exemptions, and home improvements. Property taxes are based on the value of your home and can be used as a deduction come tax time. As a homeowner, you may also be able to take advantage of deductions and exemptions that can reduce your overall tax burden. Finally, any home improvements you make, and the liabilities necessary to make those improvements may also be eligible for certain credits.
There are a few important things to know about property taxes. The first is that you could incur some painful penalties if you don’t pay your property taxes. But there are a few options for paying your property taxes, which gives you the option to do what is most convenient. There are many mortgage companies that allow you to pay property taxes out of an escrow account that you can set up with your mortgage. When you buy your property you can get an estimate of your property taxes before you purchase the home. When you do that, you may have money automatically deducted for property taxes so you don’t have to worry about it.
Learn what deductions and credits you quality for as a homeowner
But just because you pay property taxes doesn’t mean you don’t get some advantage for doing so. You can deduct what you have paid in property taxes on your federal income tax. And in select cases you may be eligible for property tax exemptions. But you will need to check with your tax preparer to see if you qualify for that based on your location or income situation.
There are numerous deductions and exemptions for owning property in California. One of the biggest deductions you get for owning your own home is the interest on your mortgage. There is usually a deduction for state and local taxes as well. But you will want to ask your professional about deductions for private mortgage insurance and various fees depending on the loan you took out. These deduction are subject to your adjusted gross income though, but it is definitely worth asking about.
There are also many tax incentives you get for home improvements. For example, you can get a tax credit for energy efficient equipment or solar panels. You can also get a tax deduction for certain improvements or repairs you have done for your home. Bank of America has noted that if you have added an in-law suite (ADU), replaced the roof, or even put in new attic insulation you may be eligible for tax deductions.
Find out if it is better to itemize your deductions
One thing to consider when it comes to taxes is whether or not you should itemize your deductions. So, instead of taking the standard deduction, you would take each individual deduction you qualify for. With this you make an itemized list of all of deductions you qualify for in order to get the biggest refund (or lowest amount owed) on your taxes. It can be a complicated decision so this is not a decision or task you should do on your own. But it is a question to ask your tax professional.
The important factor in this is making sure your itemized deductions are more than your standard deduction. It can be a lot of work, and a trouble that is not worth is if your standard deduction is greater or similar to the iitemized deductions. But if you have a lot of home-related expenses, then it could work out in your favor to itemize your deductions.
When it comes to itemized deductions the ones with the biggest impact will be your mortgage interest, property taxes, and private mortgage insurance. Other deductions can include energy efficient improvements or repairs done on the home. These are usually major necessary repairs for the habitability of the home or energy efficient upgrades like installing solar panels. Each state may have their own nuances as well so it is important to find out if there is an valuable exemption or two that California may take into consideration this year.
Ask about capital gains tax on homes
Often times there is a major tax implication of selling a house. If you sell your home at a price substantially more than your original purchase price but didn’t reinvest that money there may be a capital gains tax you need to pay. To avoid this additional cost incurred from a home sell investors will often roll the profit from the house into a retirement account or use it to purchase another investment property. If not you will have to consider your capital gains taxes. This is a tax on the profit, or capital gains, you earned from the sale of your home. The government looks at this similar to income, and with income being taxed this would be also. So it is important to understand what these taxes entail and how much you will owe.
According to the California Franchise Tax Board (FTB), capital gains tax on homes applies to gains from selling or exchanging property. This includes gains from selling a home, stocks, bonds, and other types of investments. Homes can somtimes fall under this category. There are exclusions, like using the home as your primary residence for at least 2 of the last 5 years of ownership.
When it comes to selling a rental property, taxation is handled differently than for a primary residence. If you sell a rental property that has appreciated in value, you will be subject to capital gains taxes. The amount of the tax depends on several factors, such as your filing status, adjusted gross income, and the amount of profit you made from selling the rental property. These usually fall under long term capital gains and is taxed lower than ordinary income. But there are factors that the IRS looks into which may provide you an exemtion. For instance there is a capital gains exemption for seniors. It is important to speak to a tax professional about what your potential taxes will be for selling any type of property.
Educate yourself on the earned income tax credit
The Earned Income Tax Credit (EITC) is an incentive offered by the federal government to taxpayers who earn less than a certain amount of income during the tax year. This credit can provide a significant reduction in taxes owed, or even a refund depending on the family’s circumstances. To qualify, individuals must have earned income according to the chart below for 2023.
Find the maximum AGI, investment income and credit amounts for tax year 2023.
Table
Investment income limit: $11,000 or less
Maximum Credit Amounts
The maximum amount of credit:
- No qualifying children: $600
- 1 qualifying child: $3,995
- 2 qualifying children: $6,604
- 3 or more qualifying children: $7,430
If you paid over half of the total cost to maintain your home during the tax year you are filing for you may qualify for this credit. The qualifying costs would include:
- Rent, mortgage interest, real estate taxes and home insurance
- Repairs and utilities
- Food eaten in the home
- Some costs paid with public assistance
Qualifying costs must exceed 50% of total income
Knowing what qualifies for this EITC can help save money during tax season. It can also make a difference in how much you owe or if you get a refund back at year end. Properly understanding these credits is important when it comes to saving money. But like usual having a professional set of eyes guiding you is always a high recommendation.
Summary
When it comes to doing your taxes, there are many factors to consider. The biggest thing to remember is that there are professionals available to make sure you to fall into any traps. But knowing what to ask when having a meeting with them can be the difference of thousands or tens of thousands of dollars. Taxes can be complicated, and you have a lot at stake when it comes to you personal finance situation. But by asking the right questions you have everything to gain and nothing to lose. Don’t forget that you have options when preparing taxes, so it is best to walk in with a curious mindset to make sure you are taking advantage of all that is available and have the most to gain.
We are not tax professionals but we are real estate professionals. Real estate and taxes do affect each other, from the tax rates of your particular area to the closing costs incurred during a home sale. If you have any questions our team is always available to assist you with your home needs. And if your question is not in our field of expertise we have a great extended network that we can refer you to.