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Your Guide to the Tax Benefits of Homeownership

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Your Guide to the Tax Benefits of Homeownership


Owning a home makes you feel like part of the American Dream. For many people, buying a home is one of their most outstanding achievements.

However, homeownership comes with other benefits. You can get several tax breaks by owning a home.

Not everyone thinks about the tax deductibles. Buyers are still searching for homes, while new homeowners want to bask in their success for a bit. Eventually, the tax season will come, and you will want to know every deductible.

Want to know the tax benefits of homeownership? We have got you covered with our comprehensive list of tax deductions.

You Can Buy Your House with IRA Funds

You only get the tax benefits of homeownership by purchasing your first home. Some people wonder where they will raise funds to make a down payment.

Some first-time home buyers tap into their traditional or Roth IRA funds. First-time homebuyers can take up to $10,000 out of their IRA account without paying the 10% penalty.

Homeownership is one of the few ways to tap into IRA funds penalty-free before your 50s. This policy does not apply to 401(k) funds.

Home Mortgage Interest Deduction

You can deduct any interest paid to your mortgage lender. You will receive this information in an annual 1098 form.

Most lenders send out this form in January or February.

To qualify for the deduction, you must itemize your deductions. Itemizing deductions lets you account for mortgage interest and other expenses.

The mortgage interest deduction limit is currently $750,000.

Property Tax Deduction

You will owe property tax on your home. While you do not pay this tax as a renter, landlords lump property taxes into the rent payment. Whether directly or indirectly, you end up paying property taxes.

When you buy a home, you get to deduct property taxes. You can find deductions based on your home's value at the state and local levels. A highly valued home results in higher taxes, but you also get higher deductions.

Residential Energy Cost

Governments continue to incentivize people to invest in renewable energy. These energy resources preserve the planet and save money on your utility bills.

You can receive tax deductibles for using renewable energy; however, you can also receive tax credits. The government will provide a tax credit of up to 26% of the cost of solar installation. The same rule applies to wind turbines and geothermal heat systems.

You can also receive tax credits for energy-efficient windows, air-conditioning systems, and heating. Tax credits give you a more substantial tax break than tax deductibles.

A tax deduction reduces your taxable income. You save money based on your tax bracket.

A tax credit saves you more money. Tax credits entirely remove the obligation. If you get a $500 tax credit, you pay $500 less in taxes.

Mortgage Insurance Premiums

Some homebuyers cannot afford a 20% down payment on their homes. When homebuyers pay less than 20%, they incur mortgage insurance premiums.

Lenders take considerable risk letting you finance with less than 20%. Mortgage insurance premiums protect lenders in case homebuyers default.

Homebuyers can only deduct mortgage insurance premiums on mortgages from 2007 or later, but you will not have this tax break for long.

Homeowners stop paying PMI once they reach 20% equity in their homes. You will not get the deductible anymore, but you will save money overall.

Equity Loan Interest

Homeowners can take out a home equity line of credit. This loan uses your home as collateral and often comes with a low-interest rate.

You can use the 1040 form to deduct interest payments for your line of credit. The IRS limits how much home debt gets treated as equity for this deduction.

Single filters cap at $50,000, while married filters cap at $100,000. You can also get capped by your home's fair market value minus outstanding debts. You can only deduct the smaller number of these two values.

A home equity line of credit is one of the best perks of homeownership. You can get access to funds anytime you need them. Any tax-deductible on this loan sweetens the deal.

Home Office Deduction

More people started to work from home during the pandemic. The work from home movement can help you save money on your next tax bill.

A business owner can turn their home office into a nifty tax break. This tax break applies to rooms exclusively and regularly used as home offices. These offices must get used for small business activities.

Even if you do not work from home, you can still get a home office deduction. You can get a tax deduction if you use a room for storing resources for your business.

Some people allocate a closet or room to store samples or inventory. These spaces qualify for a tax deduction. Business owners with homes get numerous tax advantages.

Points you Paid When Purchasing Your Home

Some homebuyers purchase points along with their home. Mortgage points let homebuyers reduce their interest rate. A lower interest rate reduces your monthly mortgage payment.

One point equals 1% of the principal of the mortgage loan. If the principle is $100,000, buying one point will cost $1,000.

You can deduct these fees from your income, scoring a nice tax break. You can also claim points as deductibles if used in a refinance. This deduction happens over time instead of upfront.

You can get a tax break on old mortgage points if you refinance. You can get this tax-deductible even if you do not pay for the points.

Some homebuyers negotiate with the seller to pay for a mortgage point. The expense comes out of the seller's pocket, but you get to claim the deductible.

Some sellers will pay for a mortgage point to attract a buyer or get financing. Lenders will feel more confident if a buyer has a mortgage point.

A mortgage point can make or break the home financing in some cases.

Home Improvements

Did you recently upgrade your outdoor deck? Have you bought kitchen appliances recently? You can use all of these home improvement expenses as tax deductions.

Unlike the other tax deductions, it takes time to realize home improvement deductions. You can only realize these deductions after selling your home.

The costs of home improvements get added to your home's cost basis for taxing purposes. What exactly does that mean for you and your tax deductions?

Let us say you buy your home for $300,000. You have held onto it for 10 years and decided to sell it for $500,000. This transaction will trigger capital gains.

However, if you itemize your home improvement expenses, you can add those to your cost basis. If you invested $50,000 into your home, your cost basis rises from $300,000 to $350,000.

A higher cost basis lowers your capital gains. Instead of a $200,000 capital gain, you knock it down to $150,000.

Save receipts and records of every home improvement expense. Everything adds up.

While it is a nice write-off to know, not everyone pays capital gains on their home. If you are single, you will not pay capital gains on the first $250,000 in profits. This number rises to $500,000 for a married couple filing jointly.

A tax filer can only capitalize on this exemption once every two years. Home improvement deductions become more critical if you invest in real estate.

In our previous example, a homeowner raised the cost basis by $50,000. Raising your cost basis by that much will save you thousands of dollars in taxes.

If single filers have capital gains over $250,000, home improvements can put them below $250,000 on paper.

What the Tax Benefits of Home Ownership Do Not Include

You get many tax deductions as a homeowner, but homeownership does not cover every expense.

You cannot use home appraisal fees as tax deductions. Appraisers determine a property's value. This valuation helps you list your property or know if a property on the market has a fair price.

While appraisal fees represent a necessary expense, you cannot deduct them.

You also cannot deduct HOA dues. Not every homeowner pays a homeowners association. If you buy a condo, you can expect monthly HOA dues.

You also cannot deduct home insurance. Ironically, private mortgage insurance is tax-deductible. The same does not apply to general home insurance.

Get Closer to Becoming a Homeowner

You can capitalize on many tax benefits of homeownership; however, the best advantage of homeownership is the feeling of owning a home. You finally accomplished one of the biggest goals of your life.

Hommati helps you get closer to homeownership. You can reach out to our agents or browse for a home in your area. You can get in touch with agents with our free software today.