14 Tax Mistakes That Could Cost You Your Home

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It’s tax season. It’s a time to celebrate a refund for some, but a minefield of financial danger for others. The wrong move on your tax return could have major consequences, even risk your home and many homeowners don’t realize it. Taxes may not be your favorite thing to talk about (honestly, who gets up in the morning and talks about deductions?), but being aware of these most common pitfalls will help you avoid a world of hurt.

Imagine this: You’re opening a letter from the IRS, sipping your morning coffee, when you realize you owe thousands of dollars you didn’t budget for. Or maybe you’ve been flagged as tax fraud. In fact, these things happen more often than you realize, and you can end up losing your home over something as easy to avoid as these. Now, let’s dig into some of the biggest missteps to watch out for so your home doesn’t end up on Uncle Sam’s list.

Filing for Deductions You Don’t Qualify For

Tax deductions related to your home can be a great blessing, but using them incorrectly is like skating on thin ice. Maybe you saw online that you can deduct your entire home office when you have nothing more than a desk in the corner of your living room. You can run into audits or even stiff fines by claiming too much. Just remember though that only legit expenses that are directly related to your home or business apply.

Filing Late

Procrastination and taxes is a match made for financial disaster. It’s risky to file late, especially without getting an extension, and you can be penalized with interest. If you can’t pay, it’s better to file and deal with the IRS on a payment plan than not to file at all. Filing late compounds your problems. It’s like doubling down on bad decisions.

Failing to Report All Income

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Thinking you can slide by not reporting side hustle income? The IRS doesn’t play that game, either. Now Venmo, PayPal, and Etsy report earnings of over $600. Failure to take this step can result in penalties, which—no surprise there—are so large they can threaten to eat away your home equity.

Overlooking Property Taxes

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Sometimes, homeowners forget to pay their property taxes, which is common if their lender isn’t collecting them for them. Counties aren’t forgiving, though; if you fall too far behind, you could end up with a tax lien on your home. In some jurisdictions, properties are auctioned off over unpaid taxes, and yes, it’s quicker than you might think.

Ignoring Mortgage Forgiveness Tax Rules

Was part of your mortgage debt forgiven by your lender? Congrats—but don’t pop the champagne just yet. Except for exclusions (such as the Mortgage Forgiveness Debt Relief Act), forgiven debt is taxed as income. If you do not report it correctly, you can get yourself in hot water with the IRS.

Home Improvements Misclassifications

Home repairs and improvements differ and mixing them up can lead to headaches. Like the roof leak repairs, upgrades that add value to your home may reduce your capital gains tax down the road, but repairs such as a new roof are not deductible. If you get it wrong, you could end up paying more than your fair share when it comes to selling.

Not Adjusting Your Withholdings, or Forgetting to Do so

Buying a home, marriage, or maybe even a new job, can be a big life change that can throw off your tax withholdings. Adjust or else you could owe the IRS a lump sum and not get a refund. To avoid this shock, check your W4 annually.

Filing for Dependent Exemptions That You Do Not Deserve

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If you have children who are shared with the other parent, only one parent may claim them as dependents. Incorrectly filing could mean rejected returns, or worse, a long audit process. Avoid double claims by sorting this out with your ex, even if it’s awkward).

Failing to Keep Records

There is nothing you can do to save your receipts or important documents that you are throwing out, it’s like trying to put together IKEA furniture without instructions. Hold onto proof of home related expenses for at least three years. The IRS doesn’t believe you; they want proof.

Capital Gains Rules You Don’t Understand

According to Investopedia, if you sell your home, profits above $250,000 ($500,000 for married couples) can be taxable, unless you can take exclusions. If you miscalculate or ignore this, you might have an unexpected tax bill.

You Rely Only on DIY Tax Software

Tax software is great but not foolproof. A lot of software users make errors when filing. It’s sometimes worth paying for a professional to double check what you have done.

Tax Payment During a Financial Crisis

When you’re going through a rough patch financially, skipping tax payments seems like the easy way out. Unpaid taxes, however, carry interest and penalties which can add up to a lien against your home. What you really need to do instead is set up an IRS payment plan — they’re more understanding than you think.

Assuming That a Refinance Is Tax Free

Refinancing can cut your mortgage payments, but the cash out could come with tax consequences. If you don’t report this accurately, you could be penalized. Never forget to ask your lender or tax pro about the tax consequences of refinancing.

Overlooking State and Local Tax (SALT) Limits

For many homeowners, the SALT deduction cap ($10,000 for state and local taxes) has tripped them up. If you have overpaid property taxes thinking you’d be able to deduct it all, think again. The limits should be checked before you make extra payments so that you don’t waste money.

Disclaimer: This list is solely the author’s opinion based on research and publicly available information.