Homeowners in Los Angeles County are required to pay taxes on their property. The amount of tax a homeowner pays is based on their home’s value. Homeowners can deduct the property tax they pay from their federal income taxes. After a discussion with Janet Allsopp from Auditox Accountancy who was unclear about this process in the USA, being that she was from the UK, we thought we would help put more clarity on the subject for our readers too.
For a home you own, which is your principal place of residence at the start of a calendar year, it is possible to apply for an exemption of $7,000 from the assessed value. An exemption claim form is automatically given to new homeowners, but existing property owners should request this form and submit a claim.
Homeowners in Los Angeles County who have a mortgage can deduct the interest they pay on their loans from their federal income taxes. The mortgage interest deduction is one of the homeowners’ most significant tax deductions.
A change in federal tax reform in December 2017 limited deductions for home mortgage interest payments for mortgages up to $750,000 for loans arranged after December 15, 2017.
However, in California, deductions on home mortgage interest are allowed up to $1m and up to $100,000 in mortgage equity debt.
Private Mortgage Insurance (PMI)
Homeowners in Los Angeles County who have private mortgage insurance (PMI) can deduct the premiums they pay from their federal income taxes. PMI protects the lender if the borrower defaults on their loan. In many cases, homeowners who purchase a house with less than a 20% deposit must buy private mortgage insurance as an agreement in their mortgage contract.
Some advisers recommend you remove PMI from your agreement, which you can usually do if the homeowner has more than 20% equity in their house. Of course, every situation is unique, so it makes sense to obtain tailored advice on this topic.
There are criteria to meet for PMI. If the annual adjusted gross income for the house is at least $109,000, there is no qualification for a PMI tax deduction. If the adjusted gross income is less than $100,000, the PMI is entirely tax deductible.
For households with adjusted gross income between $100,000 and $109,000, it is possible to claim a PMI deduction. However, please note that for every $1,000 increase in income, the level of PMI available to claim drops by 10%.
It is also important to note that you are only eligible for a PMI tax deduction if you itemize the federal tax deductions. If you opt for the standard tax deduction, you cannot claim for a PMI tax deduction.
Itemized versus standard tax deductions
Whether itemized or standard deduction is better for you depends on your circumstances. The standard deduction has risen to $12,000 for individuals and $24,000 for couples filing jointly.
So, a couple with more than $24,000 in itemized deductions should take this route, but if the deductions are less than $24,000, they should opt for the single deduction.
Of course, as stated above, the PMI deduction is only available for itemized deductions, so there is a lot to consider. It makes sense to speak with a professional on all tax matters.
Information provided by the Urban-Brookings Tax Policy Center suggests around 90% of households opt for standard deductions over itemized deductions.
Capital Gains Tax Exclusion
Homeowners in Los Angeles County who sell their homes for a profit can exclude up to $250,000 of the gain from their federal income taxes. The exemption for married couples increases to $500,000 when they file jointly.
This is an excellent exemption for homeowners selling property, but please note it is only allowable every two years so not ideal for flipping houses.
Anyone who inherits a home in Los Angeles County and then decides to sell it is responsible for CGT at this time. However, the cost basis isn’t the original purchase price of the property; the cost basis refers to the “stepped up” value when the current owner inherited the property. The property’s original cost basis is removed, which helps the current homeowner save money in CGT.
Home Office Expenses
Homeowners in Los Angeles County who work from home can deduct a portion of their home expenses, such as rent or mortgage interest, from their federal income taxes. The home office deduction can be significant tax savings for homeowners who work from home.
Remote working is becoming increasingly popular, and some Californians can deduct expenses relating to home office purchases.
Key points include:
- The majority of people who work remotely and obtain a W-2 cannot write off home office expenses on federal taxes
- In California, it is possible to write off these expenses as miscellaneous itemized deductions.
- If the homeowner spends over 2% of their adjusted gross income on unreimbursed miscellaneous itemized expenses, they can itemize anything above the 2% level.
- An individual with an adjusted gross income of $100,000 and who spent $2,500 on home-office equipment couldn’t use the initial $2,000 towards itemized deductions. This is equivalent to 2%, but the $500 could be put towards it.
HELOC Tax Deduction
You can only deduct HELOC interest only if you used the HELOC money “to buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS. In other words, if you used the money to improve your house, you can probably deduct the amount.
The law changes in 2017 means this law is currently only applicable from 2018 to 2026, and Congress might review it at that point. However, Los Angeles homeowners can now deduct interest on home equity when they buy, build or improve their home.
If you are a homeowner in Los Angeles County, many tax deductions and credits are available to you. Our team of experts can help you understand your options and file your taxes correctly to get the most out of your refund. Have questions about homeowner taxes? Contact us today!