Aside from the obvious financial benefits, owning a house also gives you more flexibility to make it your own. Homeownership comes with a lot of perks, such as a lower tax burden and more freedom to do things like build a home theater or redesign the interior to your liking.
In the past, there were no tax advantages to renting, as all of the money went straight to the landlord. But becoming a homeowner alters that, and there are a lot of tax incentives that may help with that.
Most Important Points to Remember:
Tax deductions for mortgage interest, points, and private mortgage insurance (PMI) are just a few of the ways the Internal Revenue Service (IRS) helps make homeownership more affordable.
Homeowners who want to take advantage of these deductions should not use the standard deduction but rather itemize their taxes.
Additionally, first-time homebuyers and those who make investments in energy-efficient home modifications may be eligible for tax benefits.
Understanding Tax Credits vs. Deductions:
There is a difference between tax deductions and credits. The difference between a credit and a deduction is that the former lowers your taxable income and the latter lowers your adjusted gross income (AGI).
Tax Deductions for Homeowners:
There are a number of important deductions that homeowners may greatly benefit from:
Mortgage Interest Deduction:
The maximum allowable mortgage interest deduction for homeowners is $750,000 ($375,000 for married couples filing separately). Schedule A of Form 1040 or 1040-SR must be filled out in order to claim this deduction.
Mortgage Point Deduction:
Mortgage point payments are tax-deductible up to $750,000 in debt and lower interest rates. Paying points on a home equity line of credit (HELOC) or refinancing a loan are also deductible.
Private Mortgage Insurance (PMI):
Insured homebuyers pay PMI when their down payment is less than 20%; this premium is tax deductible depending on the buyer’s income and the date of purchase.
State and Local Tax (SALT) Deduction:
As a homeowner, you may claim up to $10,000 in state and local taxes paid, including property taxes, as an individual and $5,000 as a married couple claiming separately.
Home Sale Exclusion:
If you’ve lived in your house for at least two years before selling it, you may avoid paying capital gains taxes on up to $250,000 of your earnings (or $500,000 if you’re married).
To take advantage of these deductions, you need to be able to itemize your deductions and maintain very detailed records.
Considerations for Deductions:
Each person’s situation determines whether they should add or use the standard credit. There are big tax benefits to owning a home, but it’s important to compare expenses to the standard deduction to find the best choice.
Remember: Depending on your unique situation, the exact tax rules and deductions may differ from what is mentioned above. To be sure you’re getting the most out of your homestead tax advantages, it’s a good idea to talk to a tax expert.
There are a number of tax breaks available to homeowners, but you should still consider all of your financial options before making a final decision. Recent changes to the environment, such as the increased standard deduction, have made people think again about how much of an effect mortgage interest deductions really have.
“Owning a home isn’t just a roof over your head, it’s a tax shield above your wallet. Unlock the treasure trove of benefits and turn your dream home into a dream tax haven.”