November 24, 2021

November 24, 2021

The Tax Benefits of Homeownership

Owning a home is a huge financial investment, but it also offers certain benefits when it comes to tax season!

Owning a home is one of the most expensive investments you will make. To encourage homeownership, the Internal Revenue Service (IRS) has provided several tax breaks to offset the substantial costs of buying and owning a home. So, what exactly are the tax benefits of homeownership? Let’s find out!

9 Tax Benefits of Homeownership You Need to Know About

1. Mortgage Interest

One of the tax benefits of owning a home is that you can deduct the interest you pay on up to $750,000 of mortgage debt as a single filer or married couple filing jointly ($375,000 if married filing separately). 

To take advantage of this deduction, it’s important that:

  • The mortgage is secured by your home.
  • The proceeds will be used to build, buy, or improve your primary or secondary home.

After the end of every tax year, in January, your lender should send you the IRS Form 1098 where you detail the amount of interest you paid in the previous year. Lenders or mortgage brokers will also include interest for the partial first month of your mortgage as part of your closing. 

2. Real Estate Taxes

Another tax deduction for homeowners involves the state and local property taxes. You can deduct up to $10,000 per year if filing jointly as a married couple (or $5,000 if single or married filing separately). 

Do note that this type of tax falls under the same category as state sales taxes and state and local income taxes. This means that:

  • It can vary depending on your location. If you live in a state with high property taxes, you might not be able to deduct everything you pay. 
  • You can deduct either income taxes or sales taxes, but not both. 

If you pay your taxes through a lender escrow account, this amount is on your IRS 1098 form. If you pay directly, this will be reflected on your personal records through a check or automatic transfer.

man working at laptop

3. Discount Points

When you take out a mortgage, you can purchase discount points to lower your interest rate on the loan. And one discount point equates to 1% of the mortgage amount. For example, if you paid $275,000 for your home, each point costs you $2,750.

If your home seller paid points for you, you can still deduct them. You just need to keep a copy of that year’s tax return as you’ll need this when you sell or when you need a cost basis.

If you refinanced your loan or took out a home equity line of credit, you can receive a deduction for the points for the duration of the loan. Remember, each time you make a mortgage payment, a small percentage of the points goes to the loan. And you can deduct that amount for each month you make payments.

However, to qualify for this type of tax benefit of homeownership, you need to prove that you have legitimately paid points to reduce your interest rate.

4. Private Mortgage Insurance (PMI)

PMI is a type of insurance coverage required by some lenders if you can’t make a sufficient down payment (less than 20%). It protects them from major financial loss in case of non-repayment, short sale, foreclosure auction, or when there isn’t enough equity to cover the loss.

If you’re single or married and your adjusted gross income (AGI) is less than $100,000, you’re eligible for the deduction. If you’re married and file separately, the threshold is $50,000. You can deduct your mortgage insurance payments on your itemized tax return.

Note that if your income is too high, you can’t claim this deduction. For instance, once your AGI exceeds $109,000 ($54,500 if you’re married and file separately), you may not be eligible for this.

Also, this tax deduction for homeowners is subject to expiration, so always check the tax rules for the current year.

5. Home Office Deductions

Another substantial tax benefit of owning a home is the home office deduction. This particularly applies to small business owners, self-employed individuals, or people who regularly and exclusively use their home as the primary place of business. This is not applicable to employees who work from home.

The size of the deduction is generally based on the percentage of your home that is dedicated to the place of business. There are some exceptions, though:

  • You can deduct expenses for the part of your home where you store samples and inventory, even if it’s not the regular and exclusive business location. 
  • You can claim deductions for a separate structure of your property that is used regularly and exclusively for your business, even if it’s not the primary business location.

Some of the more common home office deductions include:

  • Depreciation
  • Home mortgage interest
  • Insurance
  • Mortgage insurance premiums
  • Real estate taxes
  • Repairs
  • Security system
  • Utilities
man sitting in home office

6. Necessary Home Improvements

Tax deductions for home improvements, specifically for medical reasons, are another significant tax benefit of homeownership. This means you can deduct permanent improvements that will help you, your spouse, or dependents who live with you.

Some examples that qualify for this tax deduction are:

  • Adding railings or ramps.
  • Installing medical equipment.
  • Lowering cabinets.
  • Widening doorways.

A crucial part of this benefit is that you need to itemize to claim it. You can only deduct medical expenses that exceed 7.5% of your AGI. Also, home improvements that increase the value of your home will be prorated to ensure deductions only apply to medical expenses.

7. Home Sale or Capital Gains

Another tax benefit of owning a home is the capital gain you acquire when you sell your home. Capital gain is the difference between the value of the property when you bought it versus when you sold it.

The tax exclusion rule notes that you don’t tax obligations on the first $250,000 of profit if you’re single or $500,000 if you’re married, given that you both meet the residency requirements.

An important element of this benefit is that you must have owned and lived in that home for two of the last five years before the sale. Also, be sure to keep receipts associated with the costs of maintaining and improving your home as these expenses can be added to your home’s cost basis.

8. Tax Credits

Tax credits are a valuable tax benefit of homeownership because they reduce your tax dollar for dollar. For instance, if you get a $1,000 tax credit, you save $1,000 on your taxes.

If you were issued a qualified Mortgage Credit Certificate (MCC) by a state or local government or a qualified agency, you may be eligible for this benefit.

9. Energy Efficiency

As a tax benefit of owning a home, you can get non-refundable tax credits for alternative energy improvements done to your home.

The eligible expenses include:

  • Fuel cell property.
  • Geothermal heat pumps.
  • Small wind turbines.
  • Solar electric property.
  • Solar water heaters.

Note that if you place the item in service during 2021, the credit is 22% of the item’s cost (with a limit of $500 on fuel cells). If you placed it in service during 2020, the credit is 26%.

There are a lot of tax benefits to homeownership. However, keep in mind that diligently paying off your home is still the best financial move. Likewise, you’ll want to take steps to maximize the value of your home. More importantly, it’s important that you consult with your financial planner and real estate agent about the best way to pay off your mortgage. 

If you need help with all things real estate in Las Vegas, the Brendan King Group can help. Contact us today to learn more.