7 Tax Benefits of Buying a Home
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If homeownership is on your list of goals, there are several tax benefits of buying a home you should know about. Two major incentives are the mortgage interest and property tax deductions, which both help you save on the thousands of dollars paid annually to your lender and local government.
Below, we break down what is tax-deductible when you own a house, along with a few other tax benefits of homeownership.
- Mortgage interest deduction
- Mortgage points deduction
- State and local taxes deduction
- Home office deduction
- Standard deduction
- Residential energy credit
- Tax-free profits on your home sale
1. Mortgage interest deduction
One of the main tax deductions you can benefit from by owning a home is the mortgage interest deduction, which allows you to deduct the interest you pay on your mortgage to buy, build or improve your main or second home.
You can deduct the interest paid on up to $750,000 of mortgage debt if you’re an individual taxpayer or a married couple filing a joint tax return. For married couples filing separately, the limit is $375,000. If you bought your home on or before Dec. 15, 2017, the mortgage interest deduction limit is $1 million for single filers and married couples filing jointly and $500,000 for married couples filing separately.
The same deduction limits apply to the interest paid on a home equity loan and home equity line of credit (HELOC). For example, if you’re a single taxpayer and the combined amount of your first mortgage and HELOC is less than $750,000, you would be able to deduct the full amount of interest paid on both loans — if they were both used to build, buy or make improvements to your primary or secondary home. If the money is used to consolidate debt, cover college costs or fund some other expense, though, you won’t qualify for the deduction. This also includes the funds you receive in a cash-out refinance.
2. Mortgage points deduction
The tax benefits of homeownership include the ability to deduct mortgage points you paid at closing when you purchased your home. One mortgage point, also called a discount point, is equal to 1% of your loan amount.
Generally speaking, you’ll deduct points over the life of your loan rather than in the year you paid them. However, there is an exception to this rule if you meet a series of tests, as outlined by the Internal Revenue Service. The tests include:
- Mortgage is secured by your main home.
- Points did not cost more than what is generally charged locally.
- Points weren’t paid in place of other closing costs, such as appraisal or title fees.
Visit the IRS website for the entire list of tests you’ll need to pass to fully deduct mortgage points in the year you paid them.
3. State and local taxes deduction
Another one of the tax benefits of buying a home is the deduction for state and local taxes (SALT), which includes property taxes. The deductible amount is limited to $10,000 for single taxpayers and married couples filing taxes jointly and $5,000 for married couples filing separately.
The cap on the SALT deduction comes with a disadvantage for homeowners in states with high property tax bills, such as California, Connecticut, Illinois and New Jersey.
Here’s an example of how this works: If you’re a homeowner who now pays $7,000 in state income taxes but your property taxes are $6,000, you will only be able to deduct $3,000 of your total property tax bill.
4. Home office deduction
If you work from home or have a home-based business, you may qualify for the home office deduction, which applies to both homeowners and renters. To qualify, you must use a portion of your home (a bedroom-turned-office, for example) exclusively and regularly for business purposes and show that your home is the main location used to conduct your business.
There are two ways to claim the deduction: the regular method, which involves determining the percentage of your home used for business activities, or the simplified method, which allows you to deduct $5 per square foot, up to 300 square feet, for the business use of your home.
5. Standard deduction
As you consider the available tax deductions when buying a home, it’s important to pay particular attention to the standard deduction allowed by the IRS. If you decide to take the standard deduction, that means you agree to deduct a set amount of money from your taxable income. Taking a standard deduction also means you can’t itemize your deductions.
Here are the standard deduction amounts for each taxpayer category:
- Single: $12,000
- Married filing separately: $12,000
- Head of household: $18,000
- Married filing jointly: $24,000
If the deductions you qualify for as a homeowner are expected to be higher than the standard deduction amount that applies to your tax filing status, then it would likely make sense for you to itemize your deductions. Otherwise, the standard deduction may work in your favor. Consult your tax professional for more guidance.
6. Residential energy credit
There’s an eco-friendly homebuyer tax credit, known as the residential energy-efficient property credit. The incentive applies to energy improvements made to a home, which might include installing solar panels and wind turbines, among other energy-efficient upgrades.
The residential energy credit ranges from 22% to 30% of the cost of the improvement, depending on what year the energy upgrades were made, and expires Dec. 31, 2021.
7. Tax-free profits on your home sale
Rounding out the tax benefits of owning a home is a perk you receive after selling your home — tax-free profits.
After you sell your house at a profit, your capital gains are tax-free up to $250,000 if you’re single and up to $500,000 if you’re married filing jointly. You must have lived in and used the home as your primary residence for at least two out of the five years before the sale date to qualify for this tax perk.
Tax benefits vs. homebuyer credits
While researching the tax benefits of buying a home, you may also be wondering: Do you get a tax credit for buying a house? The short answer is no.
There was a first-time homebuyer tax credit during the housing crisis that applied to homes purchased in 2008 through 2010, but it is no longer available. The residential energy credit aside, the tax benefits of homeownership come from the deductions mentioned previously.
Remember to contact a tax professional for additional help navigating the tax impact of buying a house.