Buying a home is the single largest purchase most people will make. Besides earning equity in your home, you should also consider the tax benefits of homeownership. Before you file your taxes this season, make sure take a look at all the benefits we’ve listed here.
5 Benefits of Homeownership to Remember This Tax Season
Before we get into it, there are some essential items to note. Tax benefits and regulations can change at any time. If you have any questions about if you qualify or if the tax benefit is still in the tax law, be sure to check with your tax professional.
For instance, the standard deduction increased with the Tax Cuts and Jobs Act (TCJA) in December 2017. This act drastically reduced the amount of filed tax returns that included a Schedule A for itemized deductions like mortgage interest.
For 2019, the amounts of the standard deduction are below:
Single or married filing separately: $12,200
Married filing jointly: $24,400
Head of household: $18,350
1. Mortgage Interest Deduction
If you own your home and decide to itemize your deductions, using Schedule A, you may be able to reduce your income by deducting the interest paid on your mortgage.
Mortgage interest can be deducted on the first $750,000 of debt ($375,000 if Married Filing Separate). For those that purchased their home before December 16, 2017, you can use the pre-TCJA limits of $1 million ($500,000 MFS).
If you have a home equity line of credit, you can possibly deduct this interest as well. The catch with is that it must be used “to buy, build or substantially improve the taxpayer’s home that secures the loan.” This interest would also be included in the previously mentioned limits.
2. Residential Energy-Efficient Property Credit
Speaking of improving your home, another credit to consider with regards to homeownership is the Non-Business Energy Property Credit.
Homeowners that make improvements to their home to improve their energy-efficiency can potentially qualify and includes enhancements such as wind turbines, solar panels, energy-efficient doors or windows, and more! There are various limits depending on the property/improvement type. Also, this was recently extended but may not be around for much longer.
3. State and Local Deductions
Another tax benefit of homeownership is a deduction for state and local taxes paid during the year, with the largest being property taxes.
Under the TCJA, these deductions are limited to $10,000 (Married Filing Separately is $5,000) which, when combined with State income taxes can be easily met.
This is an itemized deduction, so with this new limit, many homeowners do not end up utilizing the deduction as it’s more beneficial to use the standard deduction. However, it is always worth the time to do the math to see which is better for you.
4. Home Office Deductions
If you are self-employed in a home-based business or work from home, you potentially have additional deductions available to you but there are specific rules you need to follow. For example, the room must be exclusively and regularly used for business and it needs to be the primary location used for running your business.
You can figure out the home office deductions in two different ways. First, there is a simple method where you can deduct $5 per square foot with a limit of 300 square feet for business use of the home. Alternatively, you could also determine the percentage of the house used in your business and deduct that percentage of your household expenses, utilities, property taxes, trash service, etc.
If there are any questions or doubts, you can consult the IRS website or ask your tax professional.
5. Profits on Home Sale
What if you recently sold your home? Well, this is yet another tax benefit of homeownership! If you are a homeowner that has lived in your home for at least two of the previous five years, you can take the gain from the sale of your home tax free. This is limited to $500,000 if you are Married Filing Jointly ($250,000 if Single).
Of course, as with any deduction, there are rules, such as the residency requirements. There are some exceptions, for example, if you are forced to move unexpectedly, for a job change, you can potentially claim a portion of your profit tax-free on a prorated basis.
Tax Benefits of Homeownership
Whether you are looking at buying your first home or have owned your home for years, the tax benefits of homeownership can be helpful in lowering your tax bill. Just make sure you look at your own tax situation before you justify your large home purchase, based on these benefits.
Remember to always check with your tax professional and refer to the latest tax laws and regulations before filing your return each year. Contact us today to discuss your own situation today.