Owning a home comes with certain tax benefits as you enjoy certain tax deductions associated with property tax, mortgage interest as well as several other tax reliefs.
The homeowners leveraging tax benefits could save a great amount of money paid annually to their lenders and government.
Here we have outlined such tax benefits for a homeowner.
If you are a homeowner with a mortgage not greater than $750,000, you can have your interest deducted on the loan. This is one of the key advantages of owning a home. You can get a huge deduction at tax time.
The Tax Cuts and Jobs Act (TCJA) has provided this much-needed tax relief to homeowners. Prior to TCJA, the deduction used to be $1 million. Homeowners also could deduct interest applicable on up to $100,000 of home equity debt, no matter how they used their borrowed money.
Homeowners can also have their property tax deducted up to $10,000. However, taxes imposed on rental or commercial properties—and property not owned by you—can’t be deducted.
There are many ways to claim your property tax deduction.
If you use an escrow account with your lender to pay taxes, you can see the amount you paid in taxes on your IRS Form 1098—so you can get that deduction directly to your taxes.
If you submit your taxes directly to your municipality, make sure you have a record of the paid taxes.
Another great tax benefit for a homeowner is the ability to deduct mortgage points being paid at closing when they bought the house.
One mortgage point, also known as a discount point, is equivalent to 1% of your borrowed money (loan).
Simply put, the points will be deducted over your loan period rather than in the year you paid them. For example, if you paid $ 250,000 for your home, each point costs you 1% of your home, or $2,500. You will get a deduction as you pay off your loan over time.
The Internal Revenue Service has introduced some tests you need to pass to get fully deducted mortgage points you paid them. Therefore, visit the IRS website for getting the entire list of those tests.
If you run a home business or work from your residence, you can be eligible for the home office deduction that is meant for both renters and homeowners.
This tax relief requires you to use some portion of your home for business purposes and show that your property is a major location of your business.
There are two ways to opt for the deduction—the regular method that involves determining the percentage of your property used for commercial operations, or the simplified method, which lets you deduct $5 per square foot, up to 300 square feet, for the commercial use of your property.
As you look for the available tax deductions while buying a property, it is downright essential to consider the standard deduction by the IRS.
If you opt for the standard deduction, it will be deemed as your consent to get a set amount of money deducted from your taxable income. However, it won’t allow you to itemize your deductions.
Some standard deduction amounts for each taxpayer are…
If the deductions you are eligible for as a homeowner are likely to be higher than the standard deduction amount, make sure to itemize your deductions.
Tax deductions are also applied to energy efficient devices, such as solar panels, wind turbines, and other upgrades. This is known as the residential energy-efficient property credit. The residential energy credit makes up 22%-30% of the cost of the improvement, depending on what year the energy upgrades were installed.
Read Also: Second Home Tax Benefits
Aging in place means that you will be residing in your own home for the later time of your life; not shifting to assisted living or senior retirement community.
Seniors require several things to support their living conditions. You can claim for deductions for the installation of wheelchair ramps or grip bars in your home. You are also eligible to get deductions on cabinets or special equipment to support your aging.
Last but not least—you can enjoy tax benefits on the sale of your home.
This benefit is even bigger as most people are likely to sell their homes at some point.
If you’ve resided in your house for two out of five years before the sale, you can enjoy tax deductions on any profit you make for up to $500,000 if you’re married and up to $250,000 if you are single.
For example, you’re single and you buy a home for $3, 00,000 and live in the home for 5 years. Over time you invested $ 10,000 in renovations – accounting for your total investment of $3,10,000.
After five years, you sell the home for $ 6,00,000 due to the increased market value. This way, your profit is $2,90000. Luckily, none of that $2,90000 will come into taxable income. It will make a huge difference at tax time.
Understanding the tax deductions of owning a home can help you save thousands of dollars in tax. However, it is important to work with a tax consultant if somehow things are not clear to you.
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