6 tax Tips when Owning or Purchasing a Home

 

6 tax tips when owning or purchasing a homeng
6 tax tips when owning or purchasing a home

 

 

 

 

 

 

 

Here Are 6 Tax Tips when Owning or Purchasing a Home

Homeownership traditionally comes with some great tax breaks, below, we break down what is tax-deductible when you own your own home, along with a few other tax benefits of homeownership.  If homeownership is one of your goals, there are several tax benefits to owning a home that you should know about.  Two major benefits when buying a home are the mortgage interest and property tax deductions, which both can help you save thousands of dollars in taxes!

     1.Mortgage interest deduction

One of the main tax deductions you can benefit from by owning a home is the mortgage interest deduction, which allows you to deduct the interest you pay on your mortgage when you buy, build or improve your main home or a second home.  You can deduct the interest paid on up to $750,000 of mortgage debt if you’re an individual taxpayer or a married couple filing jointly.   The new tax law changed on December 15th 2017 so if you purchased your home before that date the mortgage interest deduction limit is still $1 million for single filers or married couples filling jointly.

      2. Mortgage discount-point deduction

You may have the ability to deduct mortgage points you paid at closing when you purchased your home.  One mortgage point, also called a discount point, is equal to 1% of your loan amount.  There are some rules that allow you to take the full deduction in one year or you may have to deduct it over the life of your loan.  There are a series of tests, as outlined by the IRS that can help determine this.  The test includes:

  • Mortgage is secured by your main home
  • Points weren’t paid in place of other closing costs, such as the appraisal, title or escrow fees
  • Points did not cost more than what is generally charged locally

Again check with your CPA or the IRS website for the entire list of tests you’ll need to pass to fully deduct mortgage points in the year you paid them.

 

    3. Property tax and State tax deductions

Another great tax benefit of buying a home is the deduction for state and local taxes (SALT), which includes property taxes.  The deductible amount is limited to $10,000 for  single taxpayers and married couples filing taxes jointly.  This is a combined amount so if you have multiple properties it will still cap out at $10,000 per year.

 

   4. Home office deduction

If you work form home or have a home-based business, you may qualify for the home office deduction.  To qualify, you must use a portion of your home (a bedroom-turned-office, for example) exclusively and regularly for business purposes and show that your home is the main location used to conduct your business.

There are two ways to claim your home office deduction: the regular method, which involves determining the percentage of your home used for business activities, or the simplified method, which allows you to deduct $5 per square foot, up to 300 square feet, for the business use of your home.

   5.  IRS Standard Deductions

It is important to pay attention to the standard deduction allowed by the IRS.  IF you decide to take the standard deduction, that means you agree to deduct a set amount of money from your taxable income.  Taking a standard deduction also means you can no longer itemize your deductions.

The standard deduction amounts for each taxpayer category are:

  • Single: $12,000
  • Married filing separately: $12,000
  • Head of household :$18,000
  • Married filing jointly: $24,000

If your itemized deductions you qualify for as a homeowner are expected to be higher than the IRS Standard deduction amount, then it would likely make sense for you to itemize your deductions.  Otherwise the standard deduction may work in your favor.  Again, consult your tax professional for more guidance.

 

    6. Tax-free gains on the sale of your home sale

After you sell your primary home at a profit,  your capital gains are tax-free up to $250,000 if you’re single and up to $500,000 if you’re married filing jointly.  You must have lived in and used the home as your primary residence for at least two of the last five years before the sale date to qualify for this tax perk.

 

Additional tax benefits of owning a home

Being a home owner comes with many perks, in addition to building wealth, paying down your mortgage balance, choosing when and where you will live, what colors you want to paint your walls and keeping as many furry friends as you would like, you also can likely decrease your withholding amount which would lower the tax withholding out of your paychecks.  All of these tax write-offs we wrote about will help offset what you owe and will allow you to keep more of your paychecks every month!

Remember to contact a tax professional for additional help in understanding how purchasing and owning a home will impact you at tax time.

            H a P p Y    N e W    y E a R !!!   -Amy Wagner   425.239.2723

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