Owning a home in California comes with numerous benefits, such as privacy, great weather, and tax advantages. However, tax laws can change from year to year, and staying informed is crucial. Here are four key factors California homeowners should be aware of when filing taxes this year.
- Mortgage Interest Deduction in California
While mortgage interest remains tax-deductible, California’s rules differ from federal limits. California allows homeowners to deduct mortgage interest on home purchases up to $1 million of debt, compared to the federal limit of $750,000 ($375,000 if married filing separately). Additionally, California allows a deduction on up to $100,000 in home equity debt, which can be used to substantially improve your home.
If your mortgage originated before December 15, 2017, the previous limit of $1 million still applies to both federal and state deductions, meaning these rule changes may not affect you.
- Capped Property Tax Deduction
California homeowners should also be mindful of the cap on the property tax deduction. Under federal law, the deduction is capped at $10,000 for the combined total of property taxes and state and local income or sales taxes. For those married and filing separately, this limit is $5,000. However, California still allows a deduction for real estate taxes and vehicle license fees, even though state income taxes cannot be deducted.
- New Rules for HELOC Interest Deduction
In line with federal rules, interest on home equity lines of credit (HELOCs) can only be deducted if the loan is used for qualifying purposes, such as buying, building, or substantially improving the property that secures the loan. California follows this guideline, so homeowners who used HELOCs for other purposes may not deduct the interest.
- Moving Expenses Deduction Limited to Military Members
In prior years, homeowners could deduct moving expenses related to job relocations. However, this deduction has been largely eliminated except for active-duty military members who move due to a military order. This change applies to both federal and California tax returns.
(Sources: Investopedia and Franchise Tax Board).
