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It's That Time Of Year: The Benefits of Home Ownership & Taxes

It’s that time of year again when tax season is upon us and Uncle Sam is asking for us to pay our dues. Did you know that you can actually get some tax breaks for being a homeowner? A key benefit to home ownership are the tax breaks.

Tax breaks as a homeowner can come in many forms. Here’s a list of tax breaks you can look towards to try and save some money this April.

1. Deducting Mortgage Interest

If you purchased your home prior to Dec. 16, 2017, you are eligible to deduct interest payments on up to $1 million in mortgage debt plus a home equity line of credit up to $100,000. However, due to the Tax Cuts and Jobs Act of 2017, or TCJA for short, homeowners who bought their house after the aforementioned date can only deduct the interest paid on up to $750,000 in mortgage debt or up to $375,000 if you’re married and filing separately. TCJA clarifies that you can deduct home equity line of credit interest but must still stay under the total limit of $750,000 and be used to make home improvements. This bill will remain in effect until 2026 but it remains to be seen if policies will extend or be even further amended.

To properly report your interest payments, you should receive a Form 1098. Something to note though, you can only deduct mortgage interest if you itemize your deductions. Should all of your itemized deductions for the year add up to less than $12,400 as a single filer, $18,650 as head of household, or $24,800 for married couples filing jointly, you may want to take the standard deduction instead of the itemized. This is something you should fairly easily be able to work out with your accountant or on your own with software like TurboTax.

2. Deducting Property Tax

Similar to mortgage interest payment deductions, property tax deductions were a bit different prior to TCJA. Before the rules were a bit more flexible and would allow you to deduct the entirety of your property taxes. Things are a little different now though. As of 2018 you can only deduct up to $10,000 in all of your state and local taxes combined. You’re also no longer able to deduct foreign property taxes as you could pre-TCJA.

If you’re paying taxes directly to the municipality you live in, you’re going to want to make sure that you have a record of all the money you paid. You’ll want to keep a record of things such as credit card statements, receipts, or checks used to make payment. You can also deduct any taxes you reimbursed the seller of the house if they prepaid it while they were owning the home.

3. Deducting for Points

Otherwise known as discount points, points are a form of pre-paid interest available when arranging a mortgage and a common practice in the United States. One point would equal one percent of your loan amount and by charging a borrower points, a lender can effectively increase the yield on the loan above the amount of the stated interest rate. The benefit to the borrower is that they are able to reduce the interest rate on the loan and thus obtain a lower monthly payment in exchange for more money upfront. You can take advantage of some tax benefits if you have paid points to your lender or refinanced.

4. Deducting Private Mortgage Insurance

When you put less than 20% down on your home, you’re going to need to pay a private mortgage insurance (PMI) fee. Lenders enforce this policy because they want to try and protect themselves in the event that you default on your loan. If your mortgage was taken out after 2007 it’s possible you can claim tax deductions on your PMI payments. After the signing of H.R. 1892 ,the Bipartisan Budget Act of 2018, the law allows you to claim deductions if your adjusted gross income is $100,000 or less if you’re married, or $50,000 if you’re single. This does get reviewed annually though so we advise that you keep an eye on this policy for any possible changes in the future. That said it is currently something you can and should take advantage of and is a silver lining for those who have to pay PMI because they are unable to put 20% down on their home.

5. Deduct Home Sale Profits

This isn’t something that is as commonly known, but most people can exclude home sale profits from their taxes. If you’ve lived in your home for at least two of the last five years before you sold the home, you can exclude up to $250,000 in home-sale profits if you’re single and up to $500,000 if you’re married and filing jointly. Keep in mind, this is specifically in reference to the profit and not the total sale price.

If you haven’t lived in the residence for two or more of the last five years, don’t worry, because you may still be eligible for a partial exclusion if you moved because of certain life-changing events. You could be eligible for things such as change in employment status or health. If you’re renting out a home and it’s been a few years since you lived in that residence, you’re going to want to mark your calendar so you don't forget the key dates when your two years of residency will expire - something is still better than nothing!

6. Deducting Energy Efficient Upgrades

Unfortunately a majority tax incentives for making energy efficient upgrades to your home have mostly gone away. However there are still some tax deductions you might be able to take advantage of and are therefore noteworthy. Tax deductions are still available for both electric and water heating equipment through 2021. You’re going to want to act quickly though because the longer you wait the less money you’ll get back. Here’s the percentage of equipment you can deduct based on dates of installation:

  • Jan 1, 2017 - Dec 31, 2019: 30%

  • Jan 1, 2020 - Dec 31, 2020: 26%

  • Jan 1, 2021 - Dec 31 2021: 22%

7. Deducting Your Home Office

Given there’s been a massive shift of the workforce to a work from home environment, it may perk many people’s ears to hear that there may be tax deductions for working from home. This, however, is only the case if you are self-employed. Unfortunately these tax benefits do not extend to you if you are an employee. TCJA eliminated the deduction for unreimbursed employee business expenses, including home-office expenses for employees who are working from home.

If you are self-employed or have any freelance income, you can still qualify for the home-office deduction if you use part of your home on a regular or exclusive basis for business. This doesn’t necessarily mean that it has to be its own room, just that it is an area that is entirely dedicated to work and nothing else really.

8. Deductions for Aging in Place

This is really only applicable to a more senior audience, but good knowledge for everyone to have as it may become relevant some day, or relevant for parents or grandparents. Aging in place means that a person is making a conscious decision to stay within their residence as long as they can with the comforts that are important to them. These individuals may decide to add supplementary services to facilitate their living conditions and enable a certain quality of life for themselves. Expenditures that assist with this type of aging can be tax deductible and refers to things like wheelchair ramps, grip bars in the bathtub or even lowering electrical figures.

Thanks for sticking with us until the end of this article. If you found this post helpful please like, comment and share with friends and family who you think may also benefit from this information. We're constantly pushing out new content regarding ways consumers can build their credit and wealth while optimizing their path to homeownership. So like always, stay tuned for future updates!

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