8 Ways Owning Your Home Can Save on Taxes
If you’re thinking about getting out of the rent race and jumping into homeownership, you have a lot to consider — from how much you can afford to what features you want in a home. One important factor to consider is what has the potential to make homeownership quite profitable: the tax benefits.*
The U.S. Government encourages homeownership by offering a variety of tax benefits to consumers who purchase homes. Taking advantage of these benefits can mean big savings on your annual taxes, or when the time comes to sell your home. Here’s everything you need to know about the tax benefits of homeownership for tax year 2017 and 2018.
Deduct mortgage interest and property tax payments. Homeowners who itemize deductions may reduce their taxable income by deducting interest paid on a home mortgage. This deduction is limited to interest paid up to $1 million of debt incurred to purchase or renovate a home in tax year 2017. For tax year 2018, the cap drops to a combined $750,000 for first, second and any other homes. In addition to mortgage interest, deducting property taxes paid on your home may help reduce your tax liability for the 2017 tax year, but again, only if you itemize your deduction.
Beginning in tax year 2018, property tax will no longer be a separate deduction and homeowners will instead be able to take one deduction which includes property taxes, state and local sales tax and income tax — a deduction that’s capped at $10,000 for married filing jointly.
Private mortgage insurance. If you’re paying private mortgage insurance (PMI) — and you likely are if you made a down payment of less than 20 percent — the recently passed tax bill makes this deduction, which had previously expired, available again for the 2017 tax year.
In 2018, PMI deductions are available only to taxpayers who itemize their deduction. With the standard deduction nearly doubling in the 2018 tax law, only about 5 percent of taxpayers are expected to itemize deductions, down from about 30 percent in the past.
Imputed rent. This one can get a bit muddy, but stick with us. If you were to rent a home, you would pay your landlord a designated amount in rent each month. Your landlord would then owe taxes on that income and you would not be able to deduct your rental expenses from your income. If you own your home, you’re making an investment with a return of what economists call “imputed rent.” If, for example, your mortgage payments are $2,000 per month, you’re essentially paying yourself $24,000 each year to “rent” your home. And while other countries consider that a taxable income, in the U.S., it’s not. Owners do not pay taxes on rental income from the homes they own — it is not considered taxable income.
Capital gains. If and when the time comes to sell your home, any profits made on the sale of your home may be excluded from taxable income, up to $250,000 for individuals or $500,000 for joint filers. This profit is called “capital gains” and is free income, so long as you’ve maintained the home as your primary residence in two of the preceding five years and have not claimed the capital gains exclusion for the sale of another home in the previous two years.
Energy-efficient upgrades. Most tax credits under the Residential Energy Efficient Property Credit expired after 2016, but homeowners who install solar electric and solar water heating equipment may still take advantage of this benefit through Dec. 31, 2021.
With the new tax code, the percentage of the credit varies depending on the date of installation. Upgrades made between Jan. 1, 2017 and Dec. 31, 2019 are eligible for a deduction of 30 percent, while that goes down to 25 percent for installations between Jan. 1, 2020 and Dec. 31, 2021. So if you’re considering making energy efficient upgrades in your home, sooner is better than later, if you want to get the most out of this tax incentive.
Home office space. If you work from home, the square footage of your home office and expenses for your home office are deductible as well. Tax payers may take a $5-per-square-foot deduction for up to 300 square feet. There are strict rules on what constitutes a home office, so let your tax accountant be your guide when it comes to this tax benefit.
In 2018, this deduction will be eliminated for any workers who have an office to go to but occasionally work from home. It remains in place for anyone who is self-employed and works primarily out of their home.
Home improvements to age in place. For aging homeowners, making home improvements to make the home more accessible, such as widening doorways, lowering cabinets or adding stair lifts is a deductible expense, so long as you have a letter from your doctor proving medical necessity. This benefit only kicks in once home improvements exceed 7.5 percent of your adjusted gross income.
Home equity line of credit. If you took out a home equity line of credit (HELOC), any interest paid on up to $100,000 of that debt may also be deducted, regardless of how the borrowed funds were used, at least for now. In tax year 2018, this deduction is eliminated unless the HELOC is used to buy, build or improve a property.
The tax benefits listed above each carry various restrictions and conditions which may limit your ability to take advantage of these benefits. Consult with your financial advisor and/or accountant to fully understand the opportunity for tax benefits that awaits you in homeownership.
Not only can buying a home get you out of renting, there are plenty of financial perks to owning your own home. Are you ready to take the leap and purchase your own home? Contact PrimeLending today to speak with a home loan expert in your area who can help you secure the funding needed to purchase your new home.
*PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.