Home is where the heart is... and the tax breaks. Here are some notable tax benefits for buying and owning a home.
Seriously, owning a home can not only give you a cheaper monthly payment than renting but in many cases, the tax benefits make the decision a no-brainer.
Buying and Owning a Home Tax Benefits
The interest you pay on your mortgage is deductible (in most cases)
If you own a home and don’t have a mortgage greater than $750,000, you can deduct the interest you pay on the loan. This is one of the biggest benefits to owning a home versus renting–as you could get massive deductions at tax time.
The limit used to be $1 million, but the Tax Cuts and Jobs Act of 2017 (TCJA) reduced the limit and made some clarifications on deducting interest from a home equity line of credit.
Prior to TCJA, you could deduct interest on a mortgage up to $1 million plus a HELOC up to $100,000. And it didn’t matter what your HELOC was used for (i.e., student loans, credit card debt).
TCJA clarifies that you can deduct HELOC interest but must still stay under the total limit of $750,000 and be used to improve the home. According to the IRS:
“The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.”
As you can also see, TCJA is in effect until 2026 and the law applies to mortgages and HELOCs taken out after December 15, 2017. If you’ve taken a mortgage out before that date, the $1 million limit will still apply.
The deduction is made simple if you’re using software like TurboTax, but if you’re not, just remember to review the IRS Form 1098 that will be sent by your lender and detail the amount you paid in interest on your loan on your tax return.
You can also include interest that you may have paid as part of your home closing–you can find this on the settlement sheet.
The amount you pay in property taxes is deductible, too
Another awesome benefit to owning a home is the ability to deduct your property taxes. Before TCJA, the rules were a little more flexible and you were able to deduct the entirety of your property taxes. Now things have a changed a bit.
Under the new law, you can deduct up to $10,000. The deduction for state and local income taxes was combined with the deduction for state and local property taxes, too. You also can no longer deduct foreign property taxes as you could pre-TCJA.
TCJA is in place until 2026 (through 2025). If the law is extended or modified, we could see more of this. If nothing is done, the rules will go back to the way they were before this law was enacted.
If your taxes are paid through an escrow account with your lender (i.e., they’re added into your monthly mortgage payment and paid by the lender) you will see the amount you paid in taxes on your IRS Form 1098–so you can apply that deduction directly to your taxes.
If you pay your taxes directly to the municipality you live in, you’ll need to make sure you have a record of the money you paid (i.e., a copy of the check you used). You can also deduct any taxes that you reimbursed to the seller if they prepaid it while owning the home (find these on the settlement sheet).
You can get a tax deduction for points (over the life of your loan!)
If you paid points to your lender when you got your mortgage or refinanced an existing one, you can take advantage of a tax deduction. The only caveat is that you have to have actually given money to the lender for these points.
Points are almost always expressed as a percentage of the loan. So if each point is 1.5% and your home is $300,000, each point would cost you $4,500.
Where this benefit really kicks in is if you have a home equity line of credit or you’ve refinanced your loan. According to the IRS:
“You can deduct points paid for refinancing generally only over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.”
Assuming you do meet the qualifications, you can deduct the the amount you pay toward points each month you made payments. When you make a mortgage payment, a fractional percentage is built into the loan for points–that’s the amount you can deduct. So for example, if $10 of your payment each month is for points, you could deduct $120 at the end of the year (12 x $10), given you’ve made payments every month of the year.
Talk to a tax professional before you take deductions on points.
Private Mortgage Insurance (PMI) can be deducted in some cases
Private Mortgage Insurance (or PMI) is a fee you have to pay when you put less than 20% down on your home. Lenders do this to protect themselves from losses in the event you default on your loan.
If you took your mortgage after 2007, it’s possible you can claim a tax deduction on your PMI payments. The current tax law states that you can claim the deduction if your adjusted gross income is $100,000 or less if you’re married or $50,000 if you’re single.
As of right now, you can take advantage of this, but be mindful that it gets reviewed annually. This tax deduction provides a silver lining to having to pay PMI.
You’re rewarded for making energy-efficient upgrades
While most of the tax incentives for making energy-efficient upgrades to your home have gone away, there are still a couple worth noting. You can still claim tax deductions on solar energy–both for electric and water heating equipment, through 2021. The longer you wait, though, the less money you’ll get back.
Deductions if you age in place
According to SeniorLiving.org, “aging in place means a person making a conscious decision to stay in the inhabitation of their choice for as long as they can with the comforts that are important to them. As they age these may include adding supplementary services to facilitate their living conditions and maintain their quality of life.”
If you plan to live in your home for a long time, you can deduct expenditures that assist you with aging. Some common examples are wheelchair ramps that you’d install to enter your home or grip bars in a bathtub to avoid slipping.
You may also be able to get deductions on things like lowering electrical figures or cabinets, among other home adjustments.
Benefits for those who work at home
Whether it’s a side hustle or a full-time work from home position, you can deduct your home office expenses and space that is used. The current tax law allows you to take a tax deduction of $5 per square foot, for up to 300 square feet of office space. You can get a maximum deduction of $1,500, but know that there are extremely tight guidelines on expensing your home office. Talk to a tax professional.
Conclusion
Understanding the tax benefits of buying and owning a home can help you make more financially educated decisions. In fact, you may have not known about some of these, or known the degree to which they can benefit you at tax time.
Of course, these are just two examples of possible areas of confusion, but the point is that if you run into anything you aren't 100% certain about, it's important to consult an experienced, qualified tax professional.
Source: Chris Muller - DoughRoller
As usual, should you be interested in buying or selling a home, or for any further information regarding your home, please contact me, Karen Borden, your North Alabama Real Estate Professional!
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