Benefits of Owning a Home For Taxes
Do you know the tax benefits of owning a home? Over my three decades of selling real estate, many renters have asked me this question.
It has long been understood that there are considerable financial benefits to owning a home. After all, you are paying money into an actual investment instead of your landlord’s bank account.
But beyond this primary financial benefit comes some other advantages, particularly when it comes to tax time. The tax breaks that come with homeownership are numerous.
When you own a home, you can enjoy some tax benefits that renters cannot access.
These tax advantages of owning a home and fulfilling the American dream cause many to abandon their plans to continue renting for an indefinite period.
With rents around the country skyrocketing, the tax breaks for homeownership only become more magnified!
The tax breaks you will get from owning your home will vary based on some factors, but suffice it to say that the average homeowner typically gets thousands of dollars in tax deductions related to homeownership.
These deductions are considerable and will be especially notable if you have been renting.
How Does Buying a House Affect Taxes?
You’re probably wondering how homeownership tax benefits apply to you.
The tax law changes all the time. When you make a home purchase, you must speak with a financial or tax advisor. When buying a home, a professional will determine your taxable income and tax liability for that tax year.
A professional will also highlight all tax incentives, including property tax deductions.
The Tax Cuts and Jobs Act doubled the standard deduction a few years back. Hence, fewer taxpayers benefit from itemizing deductions like local property taxes and mortgage interest deductions.
The amount you save from the tax breaks for owning a home depends significantly on your filing status and income. Regarding the standard deduction, married couples are disadvantaged compared to single filers.
- The standard deduction for single filers and married filing separately is $12,950.
- The standard deduction for married couples or joint filers is $25,900.
- The standard deduction for the head of household is $19,400.
Additional tax benefits of homeownership favor single and high-income earners when it comes to itemized deductions.
Specific Tax Benefits of Owning a House
There are several standard tax deductions that homeowners can claim, including the following:
Local Taxes For Real Estate
One of the most common questions is whether property taxes are deductible. The answer is yes, but there are limits.
Every year the local government gets its fair share of taxes from homeowners. These real estate taxes allow a city or town to maintain a proper fiscal budget.
You can expect to pay some property taxes wherever you purchase a home. The local school district, the county, and the town or city itself may need funds yearly to provide services to the community where your home is located.
Usually, based on the house’s assessed value, property taxes are an expense that every homeowner needs to plan for. It’s referred to as your tax assessment.
They can be costly, especially in some regions of the country. So much so that many homeowners will appeal their high property taxes when they feel they’re being taxed unfairly compared to others.
There are Limits on Property Tax Deductions
You can deduct local and state property taxes in the year you pay them. This tax incentive is limited to $10,000 per year if you’re married and $5000 if single or married and filing separately.
The deduction falls under the same umbrella as sales and state income taxes. If you reside in a state with high property taxes, deducting everything you pay might not be possible. Lastly, you’ll only be allowed to deduct state and locale income or sales taxes but not both.
The $10,000 cap will apply to either state and local income taxes plus your property taxes or state sales taxes plus your property taxes. The deduction for real estate taxes applies to your primary residence and a second home.
However, there are some limitations to this tax benefit. For example, you cannot deduct for home improvements done by the municipality that increase property value. Items like this would include assessments for sidewalks, sewer lines, water mains, parking lots, and other similar things.
The capital gains tax exclusion is one of the best financial tax incentives for owning a home.Click To TweetReal Estate Capital Gains Exclusion
The capital gains exclusion from selling your home is easily the most substantial tax benefit an owner gets from ownership. When you sell your home – hopefully for more than you bought it – you get to keep the profits up to $500,000 when married and $250,000 if you are single.
Considering that selling other investments, like stocks or bonds, is often taxed at around 15%, you can see why this is a great benefit. You can walk away with up to half a million dollars without paying taxes.
Typically, these profits are used to buy another home, so the tax system is designed this way. You invest your tax-free money in more real estate – the smart move for you and the economy.
The latest version of the capital gains exclusion was a tax advantage put into place in 1997. You can read about real estate capital gains taxes in our comprehensive article explaining everything you need to know.
Find out who is eligible and who isn’t. See some other provisions of the law you may not be familiar with, including the military tax exclusion, spousal death exclusion, and the wealthy tax loophole that was closed.
The sale of the home tax exclusion is one of the best tax breaks for homeownership. It is also essential to know about paying capital gains on a second home.
Mortgage Interest Deduction
In all the excitement of purchasing a home, many buyers forget about the home-buying tax deductions come April of the following calendar year.
They include mortgage interest, discount points, property taxes, prorated interest, mortgage insurance, and a few others.
When you take out a home loan, you can expect to pay a considerable amount of interest, depending on the home’s price and the mortgage rate.
Much of this interest is paid upfront on the loan, meaning that your monthly payments will be towards interest – two-thirds of each payment in many cases for the first years of homeownership.
Even if you get a fantastic rate on your mortgage, you are still borrowing hundreds of thousands of dollars, which results in a sizable interest payment.
Fortunately, you can deduct this mortgage expense from your taxes.
It’s referred to as the mortgage interest tax credit.
Filing Status Applies to Mortgage Interest Deductions
The amount of mortgage interest you can deduct again depends on your filing status. If married, you can deduct the interest you’ll pay up to $750,000 or mortgage debt. If you are single or married, filing separately will cut the amount in half to $375,000.
So if your mortgage is more than $750,000, you won’t be able to deduct over that threshold with one exception.
A higher limitation applies for married couples up to 1 million and $500,000 if filing separately when you deduct mortgage interest from indebtedness from December 16, 2017.
For most home buyers, this means you will be able to deduct mortgage interest throughout the life of the loan.
If you were to take out a mortgage for $300,000 and had a fixed-rate loan at 4% for 30 years, you would pay around $11,000 over the first year towards interest.
If you fall into the 25% tax bracket, you can deduct approximately $2750 off your taxes.
Being able to deduct an extra $2750 from your yearly tax bill is something anyone can appreciate. That could be a couple of months’ rent in some areas, depending on the property you are renting.
Discount Points
As a borrower, when you got your loan for the house, you may have chosen to purchase mortgage points on the loan rate. A point is essentially 1 percent of the loan amount. Paying mortgage points are standard with most lenders.
So using the example of a $300,000 loan, one point would equal 1% of $300,000 or $3000.
There is a price for each point, but then you enjoy the benefit of having a lower interest rate on your home and the lower monthly payments that result from such an interest rate.
Typically, you should pay points to lenders if you expect to be in a home for an extended period. Some buyers choose to do this, and some do not, but those that do may be able to deduct the cost of those points.
A single-point purchase could save you $500 or more off your tax bill the first year after you buy your home.
When deciding whether it makes sense to pay points, you will want to figure out the difference in payment between paying points and not paying them.
When paying points, mortgage rates are lower.
You then need to figure out how long that difference will take for payback. If you are only planning on staying in the home for a couple of years, you would probably opt not to pay points. The difference in mortgage payments would not be enough to offset the cost savings.
Another item worth noting is that you can still deduct them when a homeowner pays your points as a seller’s concession. Make sure you keep a copy of that tax return so you’ll be able to reduce the home’s cost basis by the amount the seller paid in points.
Mortgage Insurance
Unfortunately, mortgage insurance is no longer tax deductible. You can scratch this one off the list of tax breaks.
When buying a home and putting in less than a twenty percent down payment, you will pay what’s referred to as PMI or private mortgage insurance.
For most first-time home buyers, paying a 20% down payment on a new home is impossible. Unless you make a considerable amount of money from your job, enjoy some inheritance or have help from your family, 20% is often too hefty for most people to come up with.
Many people incorrectly assume a small down payment precludes a buyer from purchasing a home. This is indeed not the case. However, the cost of not having a 20% down payment is that you must take out mortgage insurance in most circumstances.
You used to be able to deduct the cost of your mortgage insurance from your tax bill if you earned less than $100,000. This is no longer the case. Who knows if this homeownership tax break will come back in the future.
General Home Improvements
When improvements are made to your home, like remodeling the kitchen or adding a new heating system, you can’t deduct these as expenses in the year you spent the money.
However, keeping track of these improvements could reduce your taxes when you sell the property.
Some people do not realize when you make a home improvement, it could reduce your tax bill.
It is prudent that you save the receipts for all work done on your home that is considered an improvement.
Replacing old kitchen countertops with granite, replacing a new heating system, adding new windows, and replacing a roof are considered improvements.
Keep in mind, however, that not everything you do to your home is considered an improvement. A repair, for example, is not regarded as an improvement.
While the IRS does not treat repairs the same as improvements in the real sense of the word, it is. So fixing a window is not the same as replacing one.
While you cannot deduct these improvements from your current year’s tax bill, when it comes time to sell, they can be added to the purchase price of your home. This will be used to figure out the cost basis for tax purposes.
As a homeowner, it is essential to understand what improvements add value and which don’t. Many mistakenly believe that all home improvements add value. This is certainly not the case.
Energy-Efficient Upgrades
Currently, it is possible to have a tax credit of 10% of the qualified energy efficiency improved and 100% of the costs for residential energy.
When you make alternative energy improvements to your home, such as solar energy, you will get a non-refundable tax credit.
Items such as solar panels, geothermal heat pumps, small wind turbines, and solar water heaters are tax-deductible.
The energy-efficient home improvement tax credit is $500 through December 31, 2022. It is a lifetime credit.
New homeowners should take advantage of these tax breaks before the tax code changes and they disappear.
Medical-Related Home Improvements
Home improvements can be deducted as a medical expense when the purpose is for medical care for you or your .family
It is possible to deduct medically necessary home improvements that help you, your partner, or any dependents who reside on the property. A medical tax deduction would include installing ramps, widening doorways, installing lift equipment, adding railings, and lowering cabinets.
To qualify, you will need to be itemizing your deductions. You can only deduct medical expenses greater than 7.5 percent of your adjusted gross income.
Modifications that increase the house’s value must be prorated, so the deduction only applies to the medically necessary portion of your spending.
Home Equity Loans
One little-known tax break for owning a home is the ability to deduct the interest on a home equity loan or home equity line of credit (HELOC). You can take out an equity loan when making some of the home improvements discussed above.
Home equity loans and lines of credit incur interest, which may be deductible in tax years before 2018 and after 2025. The funds must be utilized for purchasing a house, constructing, or substantially upgrading the dwelling that secures the loan.
The interest generated from the loan can be deducted from your taxes up to $750,000 when married and $375,000 for married filing separately. This included all residential debt – mortgages, and home equity lines of credit.
Older mortgages before the tax law changed in 2017 may be covered under the previous limit, which was 1 million when married and $500,000 when filing separately.
To be deductible, the money has to be spent on the home whose equity is the source of the mortgage.
One of the tax benefits when owning a home as a self-employed person is the home office deduction.Click To TweetHome Office Deduction
Another tax benefit of owning a home is the possibility of deducting a home office from your taxes. You must meet some requirements in detail in the IRS guidelines, including whether it’s a principal place of your business or you regularly use a space in your home for business purposes.
Additionally, the deduction only applies to small business owners, including those who are self-employed. Employees of the business are not able to take this deduction.
There are a couple of exceptions to the rules on this tax break. You can deduct expenses with a separate building on your property that you use exclusively for your business, even if it is not your primary business location.
The second is claiming deductions for the part of your house you use to store inventory for the business without meeting exclusive and regular use criteria if it’s your only business location. Also, you can only claim the portion of your home used for business.
The most common expenses claimed with this deduction include the following:
- Home mortgage interest
- Real Estate taxes
- Insurance
- Repairs
- Depreciation
- Mortgage insurance premiums
- Utilities
You will not want to fool around with this deduction as there is a high audit rate from those who claim the home office deduction. Those in the real estate industry often claim home office expenses.
Moving Expenses When in The Military
You can deduct moving expenses if you currently serve in the armed forces. This tax break does not apply to civilians.
The moving expenses can be deducted when you are forced to move due to a change of where you’ll be stationed.
You cannot deduct expenses the military paid, or you were reimbursed.
Some of the expenses you will be able to deduct while serving our country include the following:
- Hiring a professional moving company
- Putting your possessions in a self-storage facility.
- Renting your moving truck from a company such as Uhaul or Home Depot.
- Renting a portable storage unit such as PODS.
- Lodging and travel expenses going from your previous home to your new one. This could also include the cost of shipping a car to your new destination.
- Any tips provided to a mover (make sure you have a receipt for these).
Available Tax Credits
They are vital to claim if you have a tax credit because, unlike tax deductions, they reduce your tax bill dollar for that current year.
For example, if you have a $2000 tax credit, your tax bill will be reduced by an equal amount.
If you get a tax deduction of $2000, you only save based on the tax bracket you fall into. So, if you have a marginal rate of 22 percent, a $2000 deduction saves you $444 on your tax bill.
In addition, the deduction only applies when you itemize, while a credit applies even when you don’t.
Only a handful of deductions can be applied as adjustments to your income when you don’t itemize your taxes. Some of these include self-employment retirement contributions, moving expenses for the military, and student loan interest.
Mortgage Credit Certificate
A mortgage credit certificate (MCC) is not a tax deduction. However, the MCC provides a dollar-for-dollar reduction in one’s payment when applied toward housing costs.
In some instances, it may also make borrowers eligible for financing which would otherwise have been ineligible due to their net monthly mortgage balance.
A mortgage credit certificate is sometimes offered to first-time homebuyers and low to moderate-income borrowers by their state’s Housing Finance Agency.
Here is an example of how they work: If you owe $5000 in mortgage interest for 2022 and your state issues you a 20 percent mortgage credit certificate, you will get a credit of $1000 on your tax return.
You can then include the remaining $4000 in interest with your itemized deduction if it benefits you to do so. Here is a complete explanation of how a mortgage credit certificate works.
Final Thoughts on Homeownership Tax Benefits
There are more than just tax benefits for owning a home. Over the long haul, a home is an investment. While owning a home each month, you are building equity in the property every time you make a mortgage payment.
Owning real estate long-term has historically been a wealth builder. In fact, from a long-term perspective, it is one of the best investments you can hold.
Lastly, the enjoyment one gets from having something tangible can’t be discounted. Many years of memories and happiness are made in the homes we live in.
All these things make the American dream of homeownership alive and well.
Hopefully, you have gotten a significant amount of helpful info on all the tax perks of having your own home.
It is essential to consult a professional when filing your tax return. Tax advice can vary from person to person.
Additional Helpful Tax-Related Articles
- Tax breaks from having a home – get a detailed overview of the tax benefits you will receive by deducting home expenses from your taxes.
- Is it better to rent or buy a home – see some of the essential things you need to know regarding the advantages of owning a home vs. being a renter via The New York Times.
Use these additional resources to understand the tax benefits of homeownership, including whether renting or buying makes more sense, given your life circumstances.
About the author: The above Real Estate information on the tax benefits of owning a home was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 37+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
