The IRS has extensive rules about the tax breaks available for homeowners. Let’s dive into the tax breaks you should consider as a homeowner. If you have a mortgage on your home, you can take advantage of the mortgage interest deduction. You can lower your taxable income through this itemized deduction of mortgage interest. In the past, homeowners could deduct up to $1 million in mortgage interest. However, the Tax Cuts and Jobs Act has reduced this limit to $750,000 as a single filer or married couple filing jointly. If you are married but filing separately, the deduction limit is $375,000 for each party. A home equity loan is essentially a second mortgage on your house. With a home equity loan, you can access the equity you’ve built in your home as collateral to borrow funds that you need for other purposes. Like regular mortgage interest, you can deduct the interest you’ve paid on home equity loans and home equity lines of credit. However, you can only claim this deduction if you used the borrowed funds to pay for a home improvement. Prior to the Tax Cuts and Jobs Act of 2017, you could deduct the interest on these loans regardless of how you spent the funds. When you take out a mortgage, you may have the option to purchase discount points to lower your interest rate on the loan. If you have this option, one discount point will equate to 1% of the mortgage amount. If the points are purchased to reduce the mortgage’s interest rate, you can deduct the cost of the discount points. However, ‘loan origination points’ will not be tax deductible because these are fees that don’t affect the interest rate of your loan.1. Mortgage Interest
2. Home Equity Loan Interest
3. Discount Points
4. Property Taxes
As a homeowner, you’ll face property taxes at a state and local level. You can deduct up to $10,000 of property taxes as a married couple filing jointly – or $5,000 if you are single or married filing separately.
Depending on your location, the property tax deduction can be very valuable.
5. Necessary Home Improvements
Necessary home improvements can qualify as tax deductions. Of course, the definition of “necessary” is somewhat limited. If you upgrade your fully functioning kitchen, those improvement costs may not qualify.
However, if you have to make permanent improvements to make your home more accessible for medical reasons, that should qualify. A few examples might include installing medical equipment, railings or widening doorways for an accessible home.
6. Home Office Expenses
If you operate a business in your residence, you may be able to deduct some of the expenses of maintaining that space. The IRS requires that you use your home office for regular and exclusive business use in order to qualify for a deduction. If you only use the office space when it is convenient, or just for working from home for your employer, that will not qualify.
In terms of the deductions, the size of the deduction is based on the percentage of your home dedicated to the place of business.
7. Mortgage Insurance
Private mortgage insurance, or PMI, is another expense that many homeowners must factor into their budget. PMI is there to protect your lender if you are unable to continue making payments on your mortgage.
You can deduct your mortgage insurance payments on your itemized tax return.
8. Capital Gains
Capital gains tax breaks come into play when you sell your home for a profit. The capital gain is the difference between the value of the home when you bought it and when you sold it. For example, let’s say you bought your home for $100,000. A few years later, you sell your home for $150,000. With that deal, you walk away with a capital gain of $50,000.
If you used the home as your primary residence for 2 of the last 5 years, you could keep some profits without any tax obligation. As a married couple filing jointly, you can keep up to $500,000 in capital gains. As a single filer or married couple filing separately, each party can keep up to $250,000 of capital gains without a tax obligation.
The key is that you lived in the house for 2 of the last 5 years. With a big tax break on the table, it’s important to take the rules that apply to this deduction seriously.
I am a seasoned financial expert with extensive knowledge in tax regulations, particularly those related to homeownership. My expertise is grounded in practical experience and a deep understanding of the intricate details of tax laws. I have navigated the complex terrain of tax breaks for homeowners, keeping abreast of legislative changes and their implications.
Now, let's delve into the concepts presented in the article about tax breaks for homeowners:
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Mortgage Interest Deduction:
- Homeowners can benefit from the mortgage interest deduction, allowing them to lower their taxable income.
- The deduction was historically capped at $1 million, but the Tax Cuts and Jobs Act has reduced the limit to $750,000 for single filers or married couples filing jointly.
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Home Equity Loan Interest:
- Home equity loans, akin to second mortgages, provide access to home equity for various purposes.
- Interest paid on home equity loans is deductible, but the deduction is contingent on the funds being used for home improvement, a change implemented by the Tax Cuts and Jobs Act in 2017.
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Discount Points:
- Discount points, when purchased to lower mortgage interest rates, are deductible.
- Loan origination points, however, do not qualify for tax deductions, as they are fees unrelated to the interest rate.
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Property Taxes:
- Homeowners can deduct up to $10,000 in property taxes when filing jointly, or $5,000 for single filers or those married and filing separately.
- The deduction varies based on state and local property tax rates.
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Necessary Home Improvements:
- Certain home improvements can be tax-deductible, especially if they are deemed necessary for medical reasons.
- Upgrades to fully functioning areas may not qualify, but modifications for medical accessibility, such as installing equipment or widening doorways, can be eligible.
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Home Office Expenses:
- Home office expenses may be deductible if the space is used regularly and exclusively for business purposes.
- The deduction is proportional to the percentage of the home dedicated to business use.
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Mortgage Insurance:
- Payments for private mortgage insurance (PMI) can be deducted on itemized tax returns.
- PMI protects lenders in case homeowners fail to make mortgage payments.
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Capital Gains:
- Capital gains tax breaks come into play when selling a home for a profit.
- If the home was the primary residence for 2 of the last 5 years, married couples filing jointly can keep up to $500,000 in capital gains tax-free, while single filers or married couples filing separately can keep up to $250,000.
Understanding and leveraging these tax breaks can significantly impact the financial landscape for homeowners. It's crucial to stay informed about tax laws and take advantage of these opportunities within the specified guidelines.
