Tax Deductions for Homeowners

What are the tax benefits of owning a home? Here are ten tax breaks for homeowners! 

This article is for informational purposes only. If you're seeking tax advice, please consult with a tax advisor.

When you decided to own a home as opposed to renting one, you were getting started on the road to creating an investment. To assist homeowners like yourself with the strain caused by paying high mortgages, the US government has created numerous tax deductions specifically designed to lower the payments you'll have to make during tax season. Now that you qualify for them, your next step should be to learn as much about them as possible.

We're sure that up until recently, you've probably only been claiming standard deductions on your taxes. Now that you're a homeowner, you'll learn to itemize the extra tax write-offs you claim. To add even better news to the mix, your donations to various charities and the taxes you pay to your state will provide you with even more tax deduction opportunities. Below are ten tax breaks you should know now that you own a home. 

Here are ten tax breaks when you own a home! 

1. Mortgage Interest

One of the most common tax breaks available to homeowners is deducting interest paid on a mortgage. Huge tax breaks come in the form of deducting mortgage interest for most people. Interest incurred on up to $1 million of debt obtained by acquiring and/or improving a home can be deducted.

Around January, you should receive a form 1098 from your lender that lists all interest paid on your mortgage the prior year. This information will be used on Schedule A as your deduction amount. It's important to ensure that all interest paid from the day you purchased the home until the last day of that month is listed on Form 1098.

The amount should be printed on the settlement sheet. It can still be deducted if you find that it's not listed. The US government will pay 25% of the interest on your behalf if you're a part of the 25% tax bracket.

2. Points

To obtain your mortgage when buying a house, lenders may require you to pay what is known as “points”. These “points” are typically a certain percent of the total loan. For the points to be considered deductible as interest, there are a few requirements that need to be met:

1. It's a secured loan from your home.

2. The points you are required to pay our common for your area.

3. The cash amount paid as a down payment was equal to the points.

Here's an example:

For a $300,000 mortgage, you paid a total of 2 points (2%). If you contributed a minimum of $6000 (2% of $300,000 = $6000) towards the deal, the 2 points can be deducted.

*The points can be deducted from your taxes even if the seller actually pays for them as a stipulation in the deal. Remember, this amount should be printed on your 1098 form.

3. Property Taxes

Local property taxes can be deducted each year also. If you use an escrow account to pay your taxes, this amount may be listed on a form sent to you by your lender. You might find the amount in your checkbook registry or personal records if you pay your municipality directly. It's possible that you might've reimbursed the seller for prepaid real estate taxes the year you purchased your home from them.

In this case, the amount you reimbursed them will also be shown on your settlement sheet. You want to make sure to add this amount to get a deduction for real estate taxes. Remember that escrow account payments cannot be deducted as real estate taxes. The deposit you made/make will be applied to future tax payments. Only the amount paid during the actual year can be deducted as real estate tax.

4. Mortgage Insurance

If a buyer makes a down payment for under 20% of the home's total cost, they usually incur premiums on their mortgage insurance. This extra charge protects the lender if the buyer can't repay their loan. Buyers can now deduct these insurance premiums on all mortgages issued during or after 2007.

On tax returns listed as "Married - Filing Separate," the deduction decreases more and more as the adjusted gross income rises above $50,000. The same happens on all other tax returns where the adjusted gross income rises above $100,000.

*This doesn't apply to anyone paying for mortgage insurance before 2007.

5. Tax & Penalty-Free IRA Payouts

There is a penalty of 10% for individuals who make "pre-age" withdrawals from their IRAs. To encourage home buying, this penalty does not apply to first-time homeowners who make withdrawals from their IRAs to use as down payments. However, the penalty is still imposed on individuals withdrawing from their 401(k) plans.

You can withdraw up to $10,000 from your IRA to purchase or build your first home for you and/or any loved ones at any age, completely penalty-free. The only downside is the $10,000 limit is for your entire lifetime. It is not on an annual basis. Each spouse and a married couple can take advantage of the $10,000 limit for a total of $20,000 together. The only stipulation is that within 120 days after its withdrawal, the money must be used to buy or start construction on your first house.

Here's a great tip that you don't want to overlook:

To qualify as a "first-time buyer," it doesn't have to be your first time buying a home. As long as you haven't owned a home within the span of two years, when you do purchase one, you are considered a first-time buyer all over again. Now, even though that may sound great, it does still have its drawbacks. You should only use IRA money as an almost last resort because it'll still be taxed in your tax bracket. This means that federal and state taxes could claim up to 40% or more of that $10,000 you needed for a down payment. That's not good at all.

This makes a Roth IRA a better option when saving to purchase a first home. Any and all contributions made to a can be withdrawn penalty-free and tax-free anytime you like. The money can be used for any reason you deem necessary. After 5 years of an open Roth IRA account, up to $10,000 of additional earnings can be withdrawn and penalty and tax-free for a home purchase.

6. Home Improvements

It’s a good idea to keep all records and receipts for every improvement made to the home. No matter their minor or major, they will come in handy later.

These expenses aren't deductible at the current moment but will be included in the purchasing price when tax season comes around to determine the value of your home. Even though almost all home sales profits are tax-free, the IRS can still potentially request part of your profits once the home is sold. Keeping track of your calls basis will help reduce any possible tax bills.

7. Great Energy Credits

If you make energy-saving home improvements, you may qualify for what is known as an energy tax credit. The special tax credits can be worth up to $500. Says they actually reduce your tax bill dollar for dollar, these tax credits tend to be more valuable than a typical tax deduction.

Energy-efficient skylights, central air conditioners, furnaces, exterior doors and windows, water heaters, boilers, and even insulation systems can allow you to qualify for energy tax credits up to 10% of their costs.

More expensive and efficient energy equipment, such as solar-powered generators, can qualify you for even better energy tax credits worth up to 30% of their costs. The good news is there is no dollar limit on these credits.

8. Tax-Free Profit on Sale of Home

The current tax law provides homeowners another benefit of owning a home. A huge amount of profit can be tax-free if certain requirements are met. For example:

· Up to $250,000 can be considered tax-free for a person who is single and resided in the house for at least 2 of the 5 previous years before its sale.

· Up to $500,000 can be considered tax-free profit for individuals who are married and found a joint return. If the home was owned by one or both spouses, considered a primary residence, and lived in for at least 2 of the 5 previous years before its sale by both spouses, they will qualify for the tax-free profit.

For the most part, profit isn't usually taxed. If you take a loss on the sale, you can't write the loss off as a deduction.

This tax exclusion can be used multiple times. You're good to go if you meet all the requirements and haven't used the exclusion in the last 2 years on a different property. Profits exceeding $250,000/$500,000 are reported as a capital gain on Schedule D form.

There are exceptions to the rule where you can still qualify for the tax-free profit even if you don't reside in the house for 2 out of the 5 years before its sale. If unforeseen circumstances, such as having triplets or quadruplets, health conditions, employment situations, divorce, etc., cause you to sell your home early, you may qualify for what's known as a partial exclusion.

In simple terms, a partial exclusion means that as opposed to you getting the full $250,000/$500,000 excluding her from taxes, only a part of it will be considered tax-free. If you meet one of the exceptions and have resided in the house for at least one of the 5 previous years before its sale, 50% of the profit will be tax-free. Partial exclusion for tax-free profit would be $125,000 for the qualifying single individual and $250,000 for the qualifying married couple.

9. Home Equity Loans

After building up enough equity in your home, you can use it as collateral for borrowing additional money to use as you see fit. You can deduct the interest charged on a home equity debt as mortgage interest up to $100,000, regardless of how you plan to use the money.

A lot of Real Estate Investors will use this strategy as a way to build their portfolio. They use the equity in their home to purchase another income-producing property.

10. Adjusting Your Withholding At Work

You can collect all the savings immediately by adjusting your federal income tax withholdings at your employment. This is highly recommended for individuals who will become itemizers for the 1st time due to the size of their mortgage interest created by their home. The proper form (W-4) can be obtained from your employer and/or by visiting www.irs.gov.

This article is for informational purposes only. It should not be considered tax advice. If you're seeking tax advice, please consult with a tax advisor.

FAQs 

Is owning a house a good tax write-off? 

There is good news for homeowners since having a mortgage can offer multiple tax benefits, including deductions on state and local taxes. 

How much tax break do you get for a mortgage? 

Homeowners can deduct up to $750,000 on the mortgage interest paid during the tax year for a primary or second home. 

Does having a mortgage help with taxes? 

Yes, Homeowners can subtract mortgage interest from their taxable income, lowering the taxes they owe during the tax year. 

Tax Breaks When You Own a Home - Final Thoughts 

Tax breaks are just one of the many benefits of becoming a homeowner. Contact us today if you are ready to save money while making a long-term investment. Whether you buy a home young or later in life, we are here to help.