While many people might not realize, there are amazing tax benefits of purchasing a house. Two significant advantages are the property tax deduction and the mortgage interest, which might translate to thousands in savings.
Understanding Tax Deductions and How it works
With tax deduction, a taxpayer can bring down the portion of their income that can be taxed. When filing taxes, one can either go through the standard deduction (a fixed value that reduces the tax by a fixed amount); or itemizing the deductions that you qualify for.
Mortgage Interest Deduction
One significant tax deduction you will enjoy as a homeowner is the mortgage interest deduction, as it allows you to remove the interest paid on the mortgage that you used to buy, build or have any improvement on your home. One can remove all interest on mortgage debt up to the value of $750,000 for single taxpayers or married filing jointly, while married filing separately has this value at $375,000.
For homes bought before 15 Dec, 2017, the deduction limit for mortgage interest is $1 million for married filing jointly alongside single filers and a half for couples going through the separate fling route.
This deduction limit also applies to interest that is paid on HELOCs and HEL (Home Equity Loans and Home equity lines of credits). For single taxpayers with the total amount of the HELOC below $750,000, you can deduct the total interest you paid on the two loans, provided they were directed to building, buying, and improving the house.
Mortgage Insurance Deduction
For the mortgage insurance paid which is part of your mortgage payment every month, it might qualify you to deduct expenses you paid from taxable income. The mortgage insurance serves as a protection for the lender if it is difficult to repay such a loan.
Homeowners that have an AGI of $100,000 (half for couples with separate filing) can remove the insurance premiums on their mortgages. Incomes up to $109,000 (or half for couples filing separately) have a lower deduction amount; for income above these thresholds, one cannot deduct the premiums for mortgage insurance.
Mortgage Points Deduction
When you buy a home, you also can deduct or remove mortgage points paid when closing the home purchase deal. A single mortgage point is also known as a discount point is the same as 1% of the loan value.
Generally, one will deduct points throughout the loan period and not the year it was paid. Some exception exists to this as long as one meets some test specified by Uncle Sam. These are:
Possession of a mortgage secured by your primary residence
Payment for points with cost that is above the general charge
Payment for points not paid instead of the remaining closing costs like title fees and appraisal.
SALT Deduction
This is the deduction for State and Local Taxes (SALT), including property taxes. Such a limit of this deduction is $10 thousand for single taxpayers and couples with the joint filing approach. This deduction limit is half for couples going through the separate filing route.
The limit on the deduction for SALT might not benefit taxpayers in a state that has excessive property taxes like:
New York
Illinois
New Jersey
Massachusetts
Connecticut
California
Tax-Free Profits on Home Sale
When you want to sell your house, you also get another tax benefit in that your profit will not be taxed.
For homes sold without a loss, you will not be taxed on the capital gains until $250,000 for single people and $500,000 for married filing through the joint route. You, however, need to have lived in the house for not less than two years to be eligible.
Deduction for Home office
People that are remote workers or you have a business operated from home might qualify for a home office deduction that is relevant to both renters and homeowners. Before you are eligible, a part of the house like a room converted to an office, "under the staircase", etc., must be used primarily for business purposes.
You also need to prove that the central business location is your home. You can claim deductions in two significant ways:
The common approach involves estimating the percentage of the house used for business purposes.
The simplified approach in which you can deduct $5 for every square foot, and allows up to 300 square feet for the part of your house you used for business.
FOR MORE INFORMATION ON HOW KAREN MUNOZ, EA. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
Karen Munoz, EA