Tax Advantages of Homeownership

When you rent there are no tax breaks available to you. However, if you purchase a townhome, condo, apartment, or single-family home there are tax deductions available to you. In this article, we will go over four of the tax advantages of homeownership.

Credit Verses Deduction

Tax credits are subtracted directly from your tax bill. This means that, for example, the total amount you owe will decrease by $500 if you claim a $500 credit. On the other hand, a tax deduction reduces your adjusted gross income. This can ultimately reduce the total taxes that you owe. You itemize deductions on Schedule A of your 1040. You receive a standard deduction automatically. This amount in 2024 is $14,600 for single taxpayers and $29,200 for couples filing jointly. For itemizing your deductions to make sense, your total deductions should be higher than the standard deduction. In this article, all the tax advantages we are going to go over are deductions.

Mortgage Interest Deduction

You can deduct the mortgage interest that you paid during the tax year. This amount can be off up to a $750,000 mortgage or $375,000 if you are a couple filing separately. To determine this amount, you will receive a Form 1098 from your lender in January. This form will detail the amount of interest paid for the year. You can also deduct any interest you paid as part of the closing process.

Mortgage Points Deduction

When opening a new loan or refinancing, some people may pay for points on their mortgage. A point costs 1% of the loan and will lower your interest rate by 0.25%. You can take a deduction for the amount you gave the lender to earn these points. Additionally, you also could claim a deduction over the life of the loan if you refinanced it or have a home equity line of credit. You do this by claiming the percentage you pay each month for the points in your mortgage payment.

State and Local Tax Deduction

The IRS lets you claim certain property taxes that you pay to state or local governments. This deduction has a cap of $10,000 for singe and married filing jointly individuals. It is only $5,000 for married filing separately. This cap is the combined total of state, local, and property tax. If you pay taxes through an escrow account, you can find the amounts on your Form 1098.

Home Sale Exclusion

When you sell your home, there are certain profit amounts that if you fall under you will not owe taxes. This amount is $250,000 in profit. The limit is $500,000 if you are filing as married filing jointly. To be able to claim this amount you will need to have called the property home for at least 2-5 years before the sale. If your profits are over these exclusion amounts you will owe capital gains tax. You would owe short term capital gains tax if you owned the property for a year or less. This can range from 10-37%. If you own the property for a year or more, you will owe long term capital gains tax. This can range from 0-20%.

Utilizing the Tax Advantages of Homeownership

Utilizing the tax advantages of homeownership will be dependent on your standard deduction. If your itemized deductions are more than the standard deduction you can utilize these homeownership deductions. If they are not more than your standard deduction you will not be able to utilize them. Unsure? Meet with your tax preparer and have them analyze your tax situation for you.

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