Are you debating on whether or not to buy a home? There are some substantial benefits of being a property owner that goes beyond not having a landlord. Here, seven of those benefits are revealed.
There are some standard deductions involved in home ownership that apply to all homeowners. Let’s look at the top four:
1. You can deduct the interest you pay on your mortgage.
According to the IRS, mortgage interest on the first $750,000 ($375,000 if married filing separately) of debt can be deducted. Higher limits ($1 million ($500,000 if married filing separately)) apply if you deduct mortgage interest from debt incurred before December 16, 2017. In most cases, all home mortgage interest can be deducted. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. IRS Publication 936 details home mortgage interest deductions.
2. You can deduct mortgage insurance.
Homeowners who pay mortgage insurance as part of their monthly mortgage payment may qualify to deduct that expense from their taxable income, depending on their income.
Typically, when less than 20 percent of the loan amount is paid down on a home purchase, borrowers must get private mortgage insurance (PMI). Mortgage insurance protects the lender if the homeowner cannot make their mortgage payments and defaults on their loan.
Homeowners with an adjusted gross income of up to $100,000 (or up to $50,000 if married and filing separately) can deduct their mortgage insurance premiums. Above those amounts, the deduction phases out. Those with an adjusted gross income over $109,000 (or $54,000 if married and filing separately) are ineligible for the deduction.
3. You can deduct state and local taxes.
If homeowners itemize them on their federal income tax return, they can take the SALT (State and Local Tax) deduction. If a homeowner pays taxes through escrow, that amount is on form 1098. Homeowners can deduct up to $10,000 of their state and local property taxes and state income or sales taxes. Income and sales taxes cannot be deducted, so you can combine property and sales taxes OR property and income taxes. A qualified tax accountant can help you determine which is best for you.
4. You can get a residential energy credit.
There are benefits for homeowners who make their home energy efficient. According to the IRS, qualified energy efficiency improvements include the following qualifying products:
- Energy-efficient exterior windows, doors, and skylights
- Roofs (metal and asphalt) and roof products
Residential energy property expenditures include the following qualifying products:
- Energy-efficient heating and air conditioning systems
- Water heaters (natural gas, propane, or oil)
- Biomass stoves (qualified biomass fuel property expenditures paid or incurred in taxable years beginning after December 31, 2020, are now part of the residential energy efficient property credit for alternative energy equipment.)
Next, there are a few other deductions that apply to some homeowners:
5. You can deduct your home office.
If you work from home like many do these days, or if you have a home-based business, you may be eligible for this deduction. A dedicated part of your home must be used exclusively and regularly for your job or business to qualify for this deduction. The home must be the primary location of your work or business.
Homeowners can determine the percentage of their home used for business or take a $5 deduction per square foot (up to 300 square feet) used for your work.
6. You can deduct improvements to your home if they are medically necessary.
The medical expenses tax deduction allows homeowners who must make medically necessary home improvements to deduct a portion of those expenses. You must itemize the expenses, and you can only deduct expenses over 7.5 percent of your adjusted gross income.
Medically necessary expenses include:
- Widening doorways or hallways
- Installing ramps or lifts
- Adding railings
- Lowering cabinets and vanities
7. When you sell your home, you can get some profits tax-free.
If homeowners decide to sell their home and have lived in it for two of the last five years, they can save big via the capital gains tax exclusion. That exclusion means a homeowner does not have to pay taxes on the first $250,000 (single) or $500,00 (married) profit from the sale of their home. This exemption is more beneficial than the capital gains deduction. Keep accurate records and track improvements and maintenance expenses, as these can impact capital gains when you sell your home.
Another thing to know about taking certain deductions, like the mortgage interest and insurance deductions, as well as the SALT deduction, is that deductions must be itemized on your federal tax return. These deductions are not applicable if you take the standard deduction.
To keep track of all these possible deductions and more that homeowners may benefit from, get in touch with your local accountant or CPA so that you can stay up to date on changing deductions, benefits, and more for homeowners.