Changes in the last few years have shifted the tax picture for homeowners. Find out how your purchase may impact you this tax season.
After the adoption of the 2017 Tax Cuts and Jobs Act, some longstanding tax benefits for homeowners were no longer available. This left some buyers wondering whether there are still compelling reasons to buy, from a tax perspective. The good news is that there are still many solid tax benefits of owning a home, as well as a variety of other financial and intangible benefits.
As with any tax issues, your individual tax picture may vary. It’s important for you to talk through your tax strategy with a financial planner or accountant to ensure you are making decisions that make sense for your specific situation.
What are the tax benefits of owning a house?
There are numerous tax advantages of owning a home come tax time.
Here are some of the most common tax deduction options related to homeownership:
1. You can claim a home mortgage interest deduction on home loans up to $750,000. For higher-priced homes, you won’t be able to deduct all of your mortgage interest payments and will have to calculate the prorated amount for the tax year.
2. If you also have a second mortgage, home equity loan, or home equity line of credit, you can deduct interest on the portion of the loan that is tied to payments for your home or for home improvements and renovations. An interest deduction is not possible if you’ve tapped into equity to pay for non-home-related items, like school or college tuition, for example.
3. You can deduct up to $10,000 in property taxes in the year in which you pay them. For homeowners living in states and municipalities with high property taxes, this may mean that you are unable to deduct all of your property tax payments. If you claim a state and local income tax deduction, you are unable to deduct sales taxes, so make sure you crunch the numbers to see which combination works best in your case for tax purposes.
4. If you pay points when you take out your mortgage, you may be able to deduct the cost. Depending on your loan specifications, you may have to deduct them all at once in the year you buy or gradually over the life of the loan. Talk to your lender and your tax advisor about the ins and outs of this home mortgage interest deduction for your specific situation.
5. For homeowners with an AGI (Adjusted Gross Income) less than $100,000, you may be able to deduct private mortgage insurance or PMI. This includes PMI associated with low-down-payment conventional loans as well as FHA, VA, or USDA loans. As with some other deductions, this one is subject to change, so be sure and check the guidelines for the current tax year before you bank on it.
6. For all of those who are working from home and self-employed, the home office tax deduction is especially beneficial. You can calculate it based on your home’s cost per square foot and the amount of space you have dedicated exclusively to your office. Alternatively, you can calculate it at a flat $5/square foot, up to 300 square feet. If you calculate it based on the percentage, you’ll need to keep in mind depreciation and other factors. If you are a full time employee and work remotely for a business, however, this tax deduction was eliminated by the 2017 tax reform law.
One bonus: if you are self-employed, you can also deduct a proportional percentage of expenses associated with the space, including a portion of costs for utilities, security, and repairs.
7. If you meet certain criteria, you may be able to deduct medically necessary home improvements. This tax deduction is only available if the improvement amounts to more than 7.5% of your AGI, if you’re itemizing deductions, and if the changes do not add to the value of your home. If they do add value, the total should be adjusted to reflect only the medically necessary portion of the expense.
8. Moving expenses used to be deductible for most, but now they are only deductible for members of the military and their families under certain circumstances. Your current or new duty station may have more information about exactly what you’ll need in order to be eligible for this deduction.
Here is the most common credit related to homeownership:9. You may be eligible for a tax credit based on renewable energy upgrades to your home. One such credit is the Department of Energy’s Federal Solar Tax Credit. There are a number of requirements so be sure to check the terms and conditions with your tax advisor. Find out if your state or municipal tax authority provides additional credits.
How much in taxes do you get back for owning a home?
Homeowner tax benefits depend in part on your filing status, income, and other factors. For example, a married couple filing jointly may garner a lower deduction than a single individual or one who’s filing as head of household. Married couples filing separately have lower thresholds and deduction amounts in many cases.
In addition, changes to the standard deduction have lowered the return on time investment you’d experience from itemizing. As with most tax implications, your mileage may vary depending on your individual financial strategy.
Is there a tax break for buying a house in 2020?
When you’re buying your home, check out tax credits offered by your state’s Housing Finance Agency or by municipal and civic government agencies. While some say they are available only to first-time home buyers, this isn’t always literally true. In many cases, if you haven’t owned a home in a few years, you are considered a first-time home buyer for the purposes of these awards.
In addition to this tax break during tax season, you may be eligible for incentive programs including grants and credits if you are relocating to a new town, city, or rural market. There are many programs available to provide
- Discounted land for new home builders
- Help with down payments and closing costs
- Discounted interest rates on mortgage products
In most cases, you are required to occupy the home as your primary residence, at least for the first several years after your purchase. These programs are run by private companies, non-profit organizations, and governmental agencies, so the details and requirements vary widely.
If you think that you qualify as a first-time home buyer, you’ll want to seek out a first time home buyer real estate agent who is familiar with programs in your area. They will also be able to help you find a lender who is qualified to administer these programs.
What other financial benefits come with owning a home?
Owning a home offers financial upsides every day, not just at tax time. Here’s how:
- When you live in a rental property, you have only a limited time on each lease. At the end of the lease term, you either have to pay to move or absorb a rise in your rent. You may wonder how much money you need to buy a home rather than rent. But when you finance a home with a fixed-rate mortgage, just like renting, you have a predictable monthly payment for your home throughout the loan’s term – and in the end, you own your home outright.
- Over time, if well-maintained, most homes increase in value and develop what is called home equity. Home buyers can take advantage of that projected appreciation to build wealth over time. In addition, with smart updates to your home on a regular basis, you can add even more to its long-term value.
- Homeownership can help you build a strong credit history when you make your payments on time each month. It also makes you look responsible to other creditors, so you may have an easier time qualifying for an auto or student loan.
Beyond these tangible benefits, home ownership offers a sense of security, privacy, and peace to you and your family. It’s where you build your memories and the foundation for your future.
When you’re ready to buy a home or are learning how to buy a second home, you need an expert on your team. Dwellful can help you find a buyer’s agent and think through your real estate needs and goals. Our agent finder connects you with well-qualified and experienced agents in the market you’ve chosen so that you can experience more peace of mind at every stage of the home buying process.