How to explore the tax benefits of homeownership
Owning a home can be a smart financial investment and a great way to build your equity. But another substantial benefit could involve a break on Tax Day.
Whether you currently are a homeowner or you’re thinking about joining the housing market, tax season is the best time to become familiar with the financial benefits of owning a home.
While you can’t deduct insurance, depreciation or utilities, there are several ways in which you can reduce the amount you owe Uncle Sam.
For current homeowners looking to reduce the amount owed at tax time, start by switching from the standard deduction to itemizing deductions. If you are looking to purchase a home, these are all ways in which homeownership could become more affordable to you.
For those looking to join the housing market and take advantage of tax breaks, start your mortgage application today!
Home mortgage interest
The most significant tax break for many homeowners is the ability to deduct mortgage interest paid. Assuming you took out a loan to buy your primary home, this applies to you. On mortgages up to $750,000, interest paid toward your mortgage can be deducted by itemizing it on Form 1040’s Schedule A.
Don’t worry about calculating your interest paid, as your lender will send you a Form 1098 in January that lists the mortgage interest you paid the previous year.
Since the passage of the Tax Cuts and Jobs Act in 2018, the maximum mortgage principal eligible for deductible interest is $750,000. Before then, the maximum was $1 million. That law also made it easier for taxpayers to save more money on their returns by raising the standard deduction amount. That’s why the vast majority of taxpayers now take the standard deduction.
If you took out home loans before Dec. 15, 2017, you are grandfathered into pre-reform limits:
- $1 million for single or married taxpayers filing jointly
- $500,000 for married taxpayers filing separately
If you took out home loans on or after Dec. 15, 2017, your total home loan limits are:
- $750,000 for single or married taxpayers filing jointly
- $375,000 for married taxpayers filing separately
The more you pay in mortgage interest payments in a year, the more it makes sense to itemize your deduction. You’ll likely be able to save more* that way than with a standard deduction, but you should probably run the numbers to find out.
Real estate taxes
Most state and local governments charge an annual tax on the value of property, often called property taxes.
These funds, though annoying to pay, are used by local and state governments for many positive initiatives in your area. Fortunately, this amount, which varies from state to state, can be deducted.
The maximum you can deduct is $40,000 if you are married and filing together or $20,000 if single or filing separately.
In addition to the property taxes you pay on your primary home, you may be able to deduct the taxes you pay on second homes. There are certain restrictions, such as needing to occupy the residence for at least 14 days of the year.
Home improvement
If you’ve taken on a big home improvement project and took out a loan to help you finance the project, you’re likely able to deduct interest on it. This includes cash-out refinance loans as well as home equity loans and HELOCs. Funds from the loan or cash-out refinance must be used to build or improve your home for the interest to be tax-deductible.
Home offices
If you are self-employed as a small business owner, freelancer or contract worker, and you work primarily from a dedicated office in your house or apartment, you might be able to claim the home office deduction come tax time.
If you own or rent your dwelling and use a designated part of your home for your business, you may be able to deduct business expenses tied to that use.
The office that you use in your home must function as your principal place of business, so not just any room with a desk will qualify.
Ideally, your home office is a separate room. Obviously, that’s not always possible, particularly in small apartments in big cities like New York or Chicago. You need to have what the IRS calls a “separately identifiable space.” It doesn’t have to be sectioned off by a wall or Ikea-style cubicle structure.
Many accountants say that installing a folding screen or curtain will do the trick. If you have a separate, free-standing structure, like a studio, garage, workshop or barn, and you use it exclusively and regularly for your business, that can also qualify for the deduction.
What can you deduct, and how do you calculate the amount?
You could deduct from your taxable income certain expenses that are directly and indirectly related to the cost of your home office, like rent, mortgage interest, utilities, painting and repairs. You can also deduct the cost of supplies like computers and desks.
There are two ways to compute the deduction.
The first is the regular method: You tally up your entire home’s total expenses and then compute a percentage of them for your home office, as measured in square feet. You also calculate the depreciation of eligible property in your home office.
The second, simpler, method lets you monthly deduct $5 per square foot of the portion of your home that is used for business, up to 300 square feet.
It may seem obvious, but it’s important not to deduct expenses for any part of your home that is not regularly and exclusively used for business purposes.
Always trust the professionals
While these cover the basics, there are additional ways that savvy homeowners can take advantage of various provisions, from energy credits to first-time buyers tax benefits.
If you’re looking for more specifics as you prepare to file, you should talk to a tax adviser, who could be able to help you better understand the tax laws and prepare you for filing your taxes.
When you know how to use them, tax benefits could make homeownership more affordable to many potential buyers.
To take advantage of these tax benefits and begin the homebuying process, you can start your mortgage application today!
*Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate Affinity for current rates. Restrictions apply.
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