There are a lot of responsibilities with home owership. So it seems fair that there are also many benefits – especially when it comes time to pay your taxes. If you already own a home, you’re probably familiar with these. But, for the rest of us looking to buy now or in the future, here are some basics on 6 tax benefits you can expect once you become a homeowner.
- The mortgage interest deduction
This is the major deduction most homeowners are eager to cash in on. The way mortgages work is that you pay most of the interest on the loan within the first several years. The good thing is that interest payments qualify as an itemized deduction (listed on Schedule A) on the federal tax return, potentially reducing your tax liability for those that can gain versus filing the standard deduction every year.
With the current tax code, you can only deduct interest up to the first $1 million (or $500,000 if you’re married but filing separately) of the loan amount. You’ll also need to provide the 1098 form you received from your lender, which lists the interest you paid.
- The mortgage points deduction
Some home buyers pay up-front fees called mortgage points to qualify for a lower interest rate on their home loan (1 point equals 1% of your total loan). If you choose to do this, there’s a double tax benefit the year you purchase a home: you can deduct both your points fee and the amount of interest you paid on your mortgage.
To claim this deduction, your loan amount must be under $1 million, and your paperwork will need to specify how many mortgage points you purchased. Just like mortgage interest, points are listed an itemized deduction on Schedule A.
- The property tax deduction
You can also claim your property taxes as an itemized deduction. Considering that the average American pays more than $2,000 each year in property taxes, this is a significant tax break (on taxes, nonetheless) for many people in the country.
- The home office deduction
If you run your business out of your home, you may also be able to claim a portion of your mortgage, utilities, and home insurance as a business expense for your home office. The guidelines for this deduction are very specific, so you’ll need to read up on it and talk with a tax professional to make sure you’re listing everything correctly. Still, it’s a tax advantage that can offset some of the expense of being both a home and business owner.
- Home improvement deductions
If you eventually decide to take out a home equity loan to make some improvements to your home, this type of loan qualifies for an interest deduction just like a mortgage. Secondly, whatever improvements you make to a home can help you when it’s time to sell. Basically, you can add the cost of improvements into the purchase price of the home and use the new total as your cost to calculate whether you owe any taxes off the profit (known as capital gains).
- The mortgage interest credit
Unlike deductions that lower your taxable income, credits apply directly to your tax bill. This one isn’t that well known to homeowners because it has very specific qualifications. You can only claim this credit if you received a Mortgage Credit Certificate from your state or local authorities when you bought your house. Qualification is based on income and the purchase price of your home, and you must subtract this credit from what you claim as a mortgage interest deduction (no double dipping).
There might be different deductions and rules by the time the next tax season rolls around (for instance, we have yet to see if the mortgage insurance deduction will be renewed for 2017), so always be sure to keep your receipts and stay up-to-date on changes.
What about you? Have you taken advantage of these and other tax advantages of home ownership?