20 Hidden Tax Costs of Owning a Home
Getting a mortgage is a big step toward homeownership, but there are other costs associated with it as well. Many homeowners are unaware of the hidden tax costs that can add up over time.
- Tricia Quitales
- 7 min read
Although buying a house is an exciting event, it also comes with a number of tax-related costs that many people don’t think about. Hidden tax costs, like property taxes and upkeep fees, can add up quickly and throw off your budget. This article discusses 20 tax costs of owning a home that are often forgotten. These include property taxes, insurance premiums, and the possible capital gains tax you may have to pay when you sell your home. Homeowners can better prepare for the financial responsibilities that come with owning a home if they know about these hidden costs.
1. Property Taxes
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Homeowners must pay property taxes yearly based on how much their home is worth. These taxes change based on where you live and can increase as property values rise. These taxes pay for schools, roads, and other community services in many places.
2. Capital Gains Tax on Sale
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If the sale price of your home is higher than the price you paid for it, you may have to pay capital gains tax. The tax is based on the profit you make when you sell the property, but primary residences are exempt. If you know how this tax works, you can prepare for any taxes you might have to pay when you sell your home.
3. Homeowner’s Insurance Premiums
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Homeowners must also pay insurance premiums to protect their homes from risks like fire, theft, and natural disasters. Homeowner’s insurance rates can change based on where you live, how much your home is worth, and the level of coverage you choose. Even though insurance premiums aren’t really a “tax,” they can be a big part of owning a home.
4. Mortgage Interest Deduction Changes
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The mortgage interest deduction lets people lower their taxable income by the mortgage interest they pay. However, because of tax changes, you can only deduct a certain amount of mortgage interest. People who own their own homes should know about changes to this deduction that could affect their total tax bill.
5. Property Tax Deduction Limitations
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You can deduct some of your property taxes from your federal taxes but not all of them. The Property Tax Deduction was limited to $10,000 by the Tax Cuts and Jobs Act of 2017. People who live in states with high taxes may think this restriction is a big cost.
6. Maintenance and Repairs
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The cost of fixing up and maintaining your home is not a tax, but it can affect your budget and how you plan your taxes. If the repairs are for a home office or to make the home more energy efficient, you may get a tax break for them. If not, you need to include these costs when figuring out how much you need to spend overall.
7. Homeowners Association Fees
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If you live in a neighborhood with a Homeowners Association (HOA), you’ll probably have to pay extra fees yearly or monthly. You can’t deduct these fees from your taxes, and depending on your community’s rules, they can add up to a lot. Most of the time, HOA fees pay for security, maintenance of the common areas, and other niceties.
8. Energy-Efficiency Upgrades
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You can save money on your utility bills by adding energy-efficient features to your home, but there may be hidden tax costs you don’t know about. Some upgrades that save energy can get you tax breaks, but the upgrades can get pricey. People who own homes should consider how investments affect their short and long-term taxes.
9. Sale-Related Costs
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You’ll have to pay closing costs when you sell your home. These include fees for a real estate agent, title insurance, and more. You can’t deduct these costs from your taxes, but you should plan for them in your budget when making plans for the sale. They can also cut down on the profit you make when you sell your home, affecting any capital gains taxes you might have to pay.
10. Second-Home Property Taxes
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If you own a vacation or a second home, you must pay more property taxes on it. Usually, these taxes are based on how much the property is worth, but they can be different in different places. People who own second homes should plan for these extra taxes when they do their annual tax returns.
11. Taxable Rental Income
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If you rent out a room or your whole house, you have to pay taxes on the money you make. You have to tell the IRS about rental income, and you’ll also have to keep track of repairs, maintenance, and other costs that come with the rental. To avoid surprises during tax season, knowing the tax rules that apply to rental income is important.
12. Mortgage Insurance Premiums
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Private mortgage insurance (PMI) is something that most people who buy a home with less than 20% down have to pay. Most homeowners don’t get a tax break for PMI, but it does add to the cost of owning a home. This extra cost could change your monthly mortgage payment or how you plan your taxes for the future.
13. Estate Tax on Inherited Property
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If you inherit a house, you might have to pay estate taxes, but it depends on how much the house is worth and how close you are to the person who died. Even though the federal estate tax thresholds are high, some states also tax inherited properties. When you inherit a property, it may need more upkeep and insurance, which adds to the hidden costs.
14. Home Renovation Tax Implications
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Making changes to your home can raise its value, which could mean that your property taxes go up. However, tax credits may be available for some types of renovations, such as upgrades that make the home more energy efficient. People who own homes should know that making changes to them could cause their property to be reassessed and their taxes to go up.
15. Property Tax Assessment Increases
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Many people have to pay more in property taxes when their home’s value goes up because of improvements and the local real estate market. You can’t always plan for these price hikes, which can throw off your financial plans. You should keep an eye on your home’s assessed value to make sure you’re not paying too much.
16. Transfer Taxes on Property Purchases
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People who buy a house might have to pay a transfer tax to the state or local government. These fees are based on the cost of the house, and they can add up fast. Buyers should account for these extra costs when making a budget for a home purchase.
17. Capital Improvement Tax Implications
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Adding a new room or updating your HVAC system are examples of big changes that can raise the value of your home. These changes might increase your property taxes but also raise the home’s cost basis, which could mean less capital gains tax when you sell. For tax purposes, homeowners should keep track of these changes.
18. Local Improvement District Taxes
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In some places, local governments charge taxes for new roads, sidewalks, or utilities that improve neighborhoods. These fees can be added to your yearly property tax bill, and those who just bought a home may not expect them. Before you buy a house, you should look into the tax rates in your area.
19. Tax on Home Office Deductions
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There’s a chance you can deduct home office costs if you use a part of your house for work. However, the IRS has strict rules about what counts as a home office, and if you don’t follow these rules, you could be fined. Before claiming these deductions, homeowners should keep careful records and talk to a tax expert.
20. Property Tax Exemption Losses
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If your income or home value changes, you might lose some tax breaks, like those for seniors or veterans. To avoid paying more in taxes, homeowners should check these exemptions often to see if they are still eligible. If you don’t keep your eligibility, you may have to pay more taxes than expected.