The IRS won’t require proof of home ownership every year when you file your taxes, but there are circumstances in which such proof is needed. If you claim the mortgage interest or property tax deduction and get audited, the IRS will want to see home ownership documents to back up your claims. You might also have to show proof of home ownership if you make home improvements for medical purposes and deduct them on your taxes, or if you have made improvements to a home and then sell it.
While you won't have to show proof of ownership every time you file your tax return, the IRS may request it if you're audited and have claimed certain tax deductions for home improvements, mortgage interest or property taxes.
Proof of Ownership of a House
If you take certain deductions, you’ll need the right home ownership documents in place in case you are audited. There are deductions you can take in the year you purchased a house, such as real estate taxes and mortgage points. You should have the closing paperwork handy for this deduction, which is also a proof of home ownership. Keep your annual mortgage statement, which shows the interest paid along with your name and address.
You can deduct the interest on a mortgage of up to $750,000 for tax years 2018 through 2025. However, the Tax Cuts and Jobs Acts signed into law on Dec. 22, 2017, grandfathers the former $1 million mortgage interest cap for mortgages taken out prior to Dec. 14, 2017. Deductions appear on Schedule A of your income tax form.
You can deduct up to $10,000 of state and local taxes, including property taxes, as of 2019; this amount stays the same through 2025. If you have a mortgage and the financial institution pays your property taxes, that institution should send that information on to you for tax purposes. If you don’t have a mortgage and pay property taxes directly to your municipality, you should receive a record of property taxes paid.
Home Improvement for Medical Purposes
Among the home-ownership documents that are important to keep is anything dealing with home improvement. If you made certain home improvements for medical purposes for yourself, your spouse or your dependents – such as installing wheelchair ramps or various lifts, widening doorways for wheelchair accommodation, modifying a kitchen or bathroom for a disabled family member – you can deduct these items as medical expenses if they exceed 10 percent of your adjusted gross income in 2019 (up from 7.5 percent in tax year 2018).
However, you can deduct such expenses only if they don’t particularly improve the value of your home. While the IRS considers most improvements for people with disabilities as not contributing to the home’s value, it states that putting an elevator in a residence is generally not deductible as it adds value to the dwelling.
Keep all receipts relating to the medical home improvements, as well as any recommendations for such improvements by a health-care provider. Keep in mind you can deduct such medically necessary improvements only in the year the improvements are made.
Regular Home Improvements
Home improvements made for non-medical purposes, and those that add value to your house, generally are not deductible, but it is important to keep records of all expenses and payments when you sell the house. They can reduce your capital gains taxes, and if you sold your house for far more than your purchase price, might make the difference as to whether you can exclude $250,000 in capital gains taxes if you’re single and $500,000 if you’re married and file jointly.
Only actual improvements, not repairs, add to your tax basis. Improvements run the gamut from adding a room, swimming pool or central air conditioning and a host of other items that increase home value. When figuring out your basis for tax purposes, you’ll need to consider the original purchase price and related fees, as well as the cost of home improvements, and subtract them from the sale price.
Exploring an Example
For example, if your house cost $200,000 in 1998 and you put another $200,000 in it over the years in improvements, then sell the house for $800,000 in 2018, your cost basis for the property is $400,000 and your capital gains is $400,000, which isn’t taxable if you’re married and filing jointly.
If you didn’t keep good records of improvements, your cost basis might not be much more than your original purchase price, which means your capital gains figure is close to $700,000, and you’d have to pay tax on the $200,000 difference between the sales price and the $500,000 capital gains exemption.
- Staple the documents to the return in the order in which the corresponding line appears on the tax return.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.