The tax benefits of owning a home are great, but also very confusing. Without doing your research you can end up missing out on thousands - if not tens of thousands of dollars in tax deductions.
To get you started, here are 7 tax benefits of owning a home - and how advantageous they can be:
Mortgage Interest Deduction
If you’ve taken out a loan to pay for your mortgage, your monthly payments go toward both your principal balance (how much your loan costs) and your interest (the percentage the lender is charging you for the loan). The interest you’re paying is tax-deductible.
Deducting the interest you pay on your home’s mortgage can reduce your taxable income. To do this, you have to itemize your deductions as opposed to taking the standard deduction of $12,400. For many of us, it’s difficult to itemize our deductions to a total greater than $12,400 without also deducting mortgage interest.
The Tax Cuts and Jobs Act (TCJA) of 2017 allows for you to deduct interest on up to $750,000 or your mortgage debt. You can also deduct the interest paid on up to $100,000 of home equity debt, no matter how you use the borrowed funds.
Property Tax Deduction
If you’re itemizing your deductions and own a home, you can also write-off your property taxes. The US Department of the Treasury, Office of Tax Analysis (OTA) that homeowners saved roughly $6 billion in because of this deduction in 2019. This number is actually down from previous years because the TCJA put an overall cap of $10,000 on the state and local taxes that you can deduct. Before 2017, you could deduct the entire sum of your property taxes.
Mortgage points are another one of the great tax benefits of owning a home that we don’t think about. When you took out a mortgage, there's a good chance that you paid “points” to your lender to get a reduced interest rate or when securing your loan.
Mortgage points usually equate to the percentage of your mortgage. In other words, 1 mortgage point = 1% of your mortgage. If your mortgage is for $300,000, 1 mortgage point = $3,000.
If you paid mortgage pounds, they are built into the loan. Check with your lender if you’re uncertain whether or not you’ve done so. The amount of your mortgage payments that includes points are tax-deductible.
Private Mortgage Insurance
In our first-time home buyer’s guide, we showed you how you can acquire a loan without putting 20% down. If your down payment is less than 20%, you have to buy private mortgage insurance (PMI), which protects your lender in the event that you default on your loan.
After spending buckets of money to buy a home and on everything else that’s required in the process, the last thing any of us wants to do is pay PMI. Thankfully, PMI goes away once your mortgage balance reaches 78% of the original purchase price as long as you are in good standing. In other words, don’t miss your scheduled mortgage payments!
If you’ve taken out a mortgage after 2007, you can deduct PMI from your taxes.
Imputed Rental Income
Imputed rent is the money homeowners earn by paying themselves instead of a landlord. If you own a home but are renting it out, the rent that you’re accruing is not taxable. Not only is this extra income, but you can use this money towards your mortgage, which you can deduct the interest and property taxes for!
In other words, let’s say your mortgage (including property taxes) is $3,000 a month and you’re renting your property for $3,500. Not only are you netting $500 a month in non-taxable income and paying your mortgage in full, but you’re also able to deduct the interest and property taxes on those mortgage payments.
If you’re going green, the IRS wants to reward you for it. Under the residential energy-efficient property credit, you can receive a tax credit of up to 26% of installation costs for any home improvement that you undertake to make your home more energy-efficient.
Unfortunately, this tax credit diminishes over time. If you claimed this credit between 2017-2019, you’d receive a 30% tax credit, and if you’re claiming it your 2021 taxes, the credit drops to 22%.
You can also claim tax rebates on smaller projects, such as energy-efficient central air conditions, furnaces, and water heaters. Check for a manufacturer’s tax credit certification statement on the product’s packaging to see if it’s eligible for a rebate. If you can’t find it on there, look up the manufacturer’s website or visit energy.gov.
Home Office Write-offs
If you’re a small-business owner or entrepreneur who works from home, you may be eligible for a home office deduction. To do this, you have to use part of your home regularly and exclusively for business-related activity.
Your home must also be your principal place of business. This means that you use the space regularly for managerial and administrative tasks, such as client meetings, billing, and setting up appointments.
What a home office is not:
If your home office qualifies, you can write off associated rent, real estate taxes, utilities, and other home-related expenses.
The easiest want to deduct your home office expenses is to determine how much money you’re paying for your mortgage and home-related expenses per square foot. For example, if you’re paying $3,000 for a 1,000sqft home and your home office is 200sqft, you can deduct one-fifth of your mortgage, or $600 a month.
If you’re trying to determine whether or not you can/should deduct your home office, we strongly recommend talking to a tax expert. They can give provide you with a more definitive “yes” or “no” answer and. If they say “yes,” they can probably find more deductions for your home office that you’d ever think of!
Final Note on the Tax Benefits of Owning a Home
Albert Einstein said that taxes are “too difficult for a mathematician. It takes a philosopher.” Luckily for him, he had someone else do his taxes - and you should, too, especially if you own a home.
The tax benefits of owning a home are numerous and are one of the many reasons why real estate is one of the best investments you can make. Tax season usually brings out one of two emotions in people: excitement or dread. As a homeowner, you’re much more likely to experience the former emotion.
Anthony Greer specializes in content writing and brand messaging development for service-based businesses. www.anthony-greer.com