Knowing what tax benefits come with home ownership is an important step in painting the picture of how your finances will look when you decide to buy. Tax advantages for homeowners are not exclusive to certain types of homes. Everything from a condominium to a large single family home can qualify for certain deductibles or credits. What tax benefits could you cash in on by purchasing a home?
Homeowner Tax Deductions
The majority of tax benefits associated with home buying come in the form of deductions. A tax deduction lowers your taxable income, thereby saving money on how much you owe as a result. Deductions are applied to your income before the tax you owe is calculated, and could potentially allow you to fall into a lower tax bracket.
Making use of deductions generally requires keeping paperwork and receipts detailing what you paid during the fiscal year. Be sure to store relevant documents in a folder for tax season. The standard deduction should also be taken into account. If your itemized deductions are less than the standard deduction, it may be more beneficial to take the standard. A tax professional can help you make the optimal choices when filing your return.
When refinancing or purchasing a new home, points are sometimes paid to the lender as either a fee to the lender on a new loan or to lower the buyer’s interest rate on their mortgage. When you pay points to refinance to a lower interest rate, you can deduct your taxes over the life of the loan. Points paid upfront to a lender may be deductible in full on that year’s tax return. Learn more about the IRS requirements for deducting mortgage points on their website.
State and Local Property Taxes
The state and local property taxes paid for your home each year also count as a deductible on your federal taxes under the state and local tax (SALT) deduction. Historically, the SALT deduction was unlimited. It which proved beneficial to residents of states with high property taxes such as California. As of 2018, tax code changes cap the SALT deduction at $10,000 for those filing as single or married filing jointly, and $5,000 for those who are married and filing separately.
You can itemize mortgage interest as a deduction. This deduction counts on interest paid on loans used to buy, build, or make substantial improvements to a primary or secondary residence. Home equity loans and lines of credit used towards things unrelated to buying or improving a home are not eligible.
2018 brought shifts in this deduction as well, with new limits on how much you can claim. If your home was purchased before December 14, 2017, the old limit of one million dollars for singles or married couples filing jointly, or $500,000 for married couples filing separately applies. Mortgages which began after this date will be capped at $750,000 for singles and joint-filing married couples, and $375,000 for married couples filing separately.
Private Mortgage Insurance (PMI)
If your lender required you to purchase private mortgage insurance, it is currently a deductible expense through fiscal year 2020. PMI was originally only valid as a deductible through the 2017 tax year. Congress has extended it as a valid deductible through tax year 2020. However, the deduction is no longer available for those with adjusted gross income (AGI) above $109,000, or $54,500 for married couples filing separately.
Home Business Space
Running a business, full time or part time, out of your home can qualify you for additional tax breaks. The percentage of your home you use as a workspace, are all a portion of your mortgage payments and utility bills. This includes percentages of utilities that go towards supporting the workspace They also counts as a deductible. The area of the home that you are claiming as a home office must only be for work purposes. You should use the space on a regular basis as well.
Homeowner Tax Credits
Tax credits are dollar-for-dollar reductions on the amount of tax you have been calculated to owe based on your AGI. Because you apply credits after you calculate your taxes, they often have a larger impact on what you owe. Credits currently exist for solar energy equipment installed on your home for electric or water heating purposes. However, the amounts are decreasing each fiscal year.
If you install the equipment between January 1, 2020 and December 31, 2020, you can receive a credit for 26% of the equipment cost. Equipment installed between January 2, 2021 and December 31, 2021 qualifies for a credit for 22% of the equipment cost.
Profits of a Property Sale
Unique from both credits and deductions, tax-free money could be available to you as a result of a property sale. You may have lived in the home for at least two years out of the last five years before the sale. Any profits on the sale are non-taxable up to $250,000 for individuals and $500,000 for married couples filing jointly.
The tax breaks associated with a home purchase should be a benefit on top of an already manageable mortgage loan. Our Vellum Loan Officers can work with you to map out a homeownership solution that compliments your entire financial story. Contact us today to take the first steps towards owning a home by getting pre-approved with Verified by Vellum.