Q: Can I claim the Homestead Deduction in Washington, D.C. for my home without changing my state of legal residence?
I am an active-duty military veteran and I own a home in Washington, D.C. and it is the only home I own. I received an audit letter from the city recently saying that in order to claim the Homestead Deduction, I would have to domicile in D.C. My current state of legal residence is Texas and I do not currently pay state taxes. I am debating whether it is worth it to pay the $3k in additional taxes due to keep my legal residence in Texas or if I should change my domicile to DC for tax reasons. Can I domicile without paying D.C. income tax?
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A:
In Washington, D.C., the Homestead Deduction requires that the property be your primary residence and that you are domiciled in D.C. Since your legal residence is currently Texas, claiming the Homestead Deduction in D.C. without changing your domicile to D.C. is not allowed. The audit letter you received indicates that you would need to establish D.C. as your legal residence to continue claiming the deduction.
If you change your domicile to D.C., you would generally be subject to D.C. income taxes, as D.C. does not have the same tax exemptions for military veterans that some states, like Texas, offer. By maintaining your Texas legal residence, you benefit from not paying state income taxes, but you may have to pay the $3,000 in property taxes in D.C. if you lose the deduction.
You may want to weigh the benefits of staying tax-exempt in Texas versus potentially lower property taxes in D.C. through the Homestead Deduction. Keep in mind that changing your domicile may affect other tax obligations. Carefully consider your long-term plans before deciding whether to change your legal residence to D.C. or maintain your status in Texas.
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