There are many considerations when deciding between renting and homeownership. Each have their benefits, but one area where homeownership has the advantage is when it comes to your taxes.
Being a homeowner presents several ways you may save on your taxes.
Federal tax laws offer a number of sizable deductions that homeowners can take on a yearly basis. Additionally, homeowners may be able to receive tax credits for actions like improving a home’s energy efficiency. When factored into the comparison, the tax savings could make owning a home more attractive.
How can owning a home save you money on your tax return?
There are a number of tax deductions you may take if you own your home. Those deductions may reduce your taxable income reducing your tax liability. Each person’s individual situation varies and it is always best to consult a tax advisor
The most important thing to know about the tax benefits of owning a home is that you must itemize your deductions to take advantage of most of them, as opposed to taking the standard deduction. According to information from the IRS, the standard deduction for married couples filing jointly is $24,800 for tax year 2020. For single taxpayers and married individuals who are filing separately, the deduction is $12,400. And for heads of households, the standard deduction is $18,650.
Depending on your financial situation, it may make more sense for you to take the standard deduction. However, it’s probably a smart move to discuss things with a tax professional who can help guide you through whether you should itemize or not.
What can you write off as a homeowner?
One quick point of clarification. You may have heard the term “write off” when it comes to your taxes. A write off is the same as a deduction. Under U.S. tax law, you are not allowed to simply “write off” certain expenses and not have them applied to your taxes. You are allowed, however, to deduct certain expenses from the amount of income that is subject to income tax thereby decreasing your overall tax liability and perhaps increasing the refund you receive.
And, as we noted above, there are several options for deductions a homeowner may take on their taxes. Let’s look at some of the biggest ones.
How much do you get back in taxes for owning a home?
The biggest homeownership-related deduction will likely be the interest you paid on your mortgage. Unless you own your home outright, you likely have a mortgage. And if you have a mortgage, odds are that you’re paying some form of interest as part of your mortgage payment.
Lenders charge you interest to lend you the money for your home; that’s the interest rate you agreed to when you bought your home or refinanced your existing mortgage.
When you make a mortgage payment, a portion of that payment goes towards the principal of your loan and another portion to mortgage interest.
Tax laws do not allow you to take a deduction for your principal payments, but that’s not the case for your mortgage interest payments.
According to IRS rules, you may deduct the interest you paid on your mortgage during a specific tax year on the first $750,000 of your loan, as long as your mortgage was originated after December 15, 2017. If your loan is older than that (originated on or before December 15, 2017), you can deduct the interest you paid up to the first $1 million of your mortgage.
How much of a tax write off is a house?
In addition to the mortgage interest deduction, let’s look at five other ways that homeowners can save on their taxes.
- Points paid when borrowing. When you took out your mortgage, your lender may have given you the chance to pay “points” to lower your interest rate. Points may be tax deductible on a mortgage taken out for the purpose of buying a new primary residence during the year the points were paid. Similarly, points paid on a home equity loan or line of credit where the money is used to work on the home are also deductible in the year the loan is taken up to certain limits. In cases where home loan funds were used to pay for other items or where points were paid as part of a refinancing, the amount may still deductible.
- Real estate taxes. Property taxes may be deductible on both your primary and vacation homes. However, it should be noted that you can claim only $10,000 in deductions for the total amount of state and local taxes (also called SALT taxes), which include property taxes. In some states, your property taxes may exceed that amount by themselves. It’s important to talk to a tax professional about your options when it comes to real estate taxes.
- Modifications to a home for health reasons. The amount possible for deduction is a factor of income and age. However, if you need to modify a home for wheelchair access, you may be able to deduct everything from the cost of installing ramps and modifying the width of hallways to possibly a therapeutic pool.
- Energy-efficiency improvements. These improvements—from upgrading the efficiency of windows and doors to water heaters and the roofing material you use—could result in credits that reduce your taxes. However, the credits are subject to congressional approval, and their availability needs to be verified each year.
- Home office. You may be able to take a deduction on your taxes if you work from home, a deduction that’s especially enticing given how many people worked from home in 2020. But before you get your hopes all the way up, we should note that you are not able to claim the home office deduction if you are employed by a company. According to the IRS, the home office deduction may only be used by “qualifying self-employed taxpayers, independent contractors and those working in the gig economy.”
There’s one other potential tax benefit from owning a home, one that might be even bigger than the mortgage interest deduction: appreciation from the sale of a primary residence.
Homeowners may exclude profit of up to $250,000 ($500,000 for joint filers) on the sale of their home. The home must have been a homeowners’ principal residence for two of the preceding five years and the owner may not have claimed the capital gains exclusion within the prior two years. So, this option is not available for people flipping a house or those who have not lived in their current house for very long.
For more information on how to claim tax deductions on your mortgage, check out this blog.
And if you have questions about buying a home or refinancing your current mortgage, our team of Loan Officers at New American Funding is standing by and ready to help.