Monthly Archive January 12, 2021

The Paperwork and Documentation of Home Ownership

Now that you own a home, start preparing yourself for the tedium that is keeping track of everything. And pay careful attention to this post if you now work from home, like many do these days.

Document Everything

The first thing to remember is that what exists today didn’t always and the future will change. Tax write-offs for mortgage interest toggles around depending on administration. Solar credits come and go, swell and recede. So do yourself a favor and create a file for every expense that happens to your home, whether a physical or digital file–though we recommend to have a digital copy of everything. This includes, but not limited to, home improvements, utilities, mortgage statements, and property tax statements. There are likely others that have been left off this list, and if you come across any expense related to your home, put it in this file.

At least as of this writing, individual homeowners can write off the mortgage interest on their homes. Your mortgage company will send you a document by January 31 letting you know how much interest you paid in the previous calendar year, and you list this in the appropriate box on your tax forms. Then essentially, your taxable income is reduced by this amount.

That is about the easiest tax piece, but you should consult with an accountant or find a good piece of accounting software (<< that is just one we have used, but it’s not the only) to help you understand all the ins and outs of other deductions.

Writing Off Home Improvements

There are essentially two main ways this could be handled, and just to say it up front, we are not accountants, but just relaying, in general, what we know on the subject. Please do your own research for your own specific situation.

In short, you can write off home improvements each year or for the years that they were completed. The second is to take the deductions when you are looking to sell. We are going to approach the second part first with our own example.

We had a cabin in WV several years ago. We owned it for six years. We didn’t do much to it, besides paint and stain, but did a few things. We did not write off any of these costs as we went along and instead piled them up, believing we wouldn’t own it forever. When it was time to sell, we ended up having an “on paper” profit above purchase price of about $30k. We were then able to put the realtor fee and the home improvements as debt, and thus avoid a capital gains tax because we could show a technical loss on the property.

The first part is a bit trickier, especially if you work from home and are writing off portions of the home as business expenses. This is very specific to individuals and how to manage your taxes, year to year, so we won’t go much farther here. In this instance, you should really contact an accountant who can guide you through not only each particular year, but in general how to handle each year knowing where you are headed.

No matter what, though, document everything. Every Home Depot receipt or gas bill or tree removal mandated by the city. It may not matter today or even be something to use this year or next, but it may be useful later. Also, it might be something that is going away, like solar credits, and you need to pounce on it before it’s gone.

If you have a file where these things go, then you don’t need to worry about these things, because you know they are always in one particular place. My husband and I have a manilla envelope and any home improvement receipt just goes in it without much further thought. Same way digitally.