Many people realize some of the perks of owning their own home. Putting money toward a mortgage instead of paying rent that goes in someone else’s pocket is one of the big ones. Smaller perks, like being able to customize your space, putting down roots in your community, and not having to get permission to remodel are other great benefits to owning your home. But something that may get overlooked is the tax benefits that come with home ownership.
Tax benefits come in two forms: deductions and credits. When it comes to tax deductions, the most prominent benefit is in your ability to deduct the interest you are paying on your mortgage. Though changes to the tax code for 2018 tax returns have decreased the amount of interest that is tax deductible, this benefit is still a big one. Homeowners can still deduct interest on a total principal of up to $750,000 (down from $1,000,000), though on primary and secondary residences only. The credit is no longer available on investment properties. These changes only apply to mortgages originated after 2017, so if you have owned your home longer than that, the old rules still apply.
Another key deduction you can take advantage of is your property taxes. This is generally tracked through an escrow account, and it will be listed on the 1098 form. Also, if you paid primary mortgage insurance (PMI), you can get a deduction for that amount paid. Likewise, if you paid points to your lender when you originated your mortgage, you can get a deduction for that amount as well. Points are calculated at 1% of the purchase price of your home. If you paid $300,000 for your home, each point is valued at $3,000.
In terms of tax credits available to homeowners, there are still several available for renewable energy improvements. These include:
Small wind turbines
Geothermal heat pumps
Information on qualifications and redemption policies are available on EnergyStar’s website. Previous credits available for measures taken to improve your home’s energy efficiency have now expired.
When you sell your home, you also enjoy the benefit of not having to pay taxes on the first $250,000 of profit (and double that if you are married, and you both occupied the home). This is known as your capital gains. If you have completed renovations and additions over the years, the costs of those improvements are figured into the original cost basis of your home. For example, if you paid $200,000 for your home in 2000, and you put a $100,000 addition on the back in 2012, your cost basis is $300,000. You then sold that home in 2018 for $500,000. You profited $300,000 off your initial purchase price, but because of that addition the IRS gives you credit for the $100,000 you spent on it. This helps you because now your first $250,000 in profits is based off the $300,000 cost basis. More of your profits are protected from being taxable.
Your home is the biggest purchase you’ll make. Whether you are living in your first home, or your fourth, you need to be aware of how you can make it work for you when tax time comes. Educate yourself on the options that might apply for your specific situation, and then get quality advice from a tax expert. Taxes can get complicated when you are a homeowner but understanding the details will save you money.