Tax Savings 101: How Owning a Home Can Lower Your Tax Bill
Owning a home provides you and your family a place you can call your own and feel more connected to your community, but it also provides several tax benefits that you should be aware of and take full advantage of. This blog is for informational purposes only and we suggest you refer to your local tax laws and/or your accountant to ensure you filed these deductions correctly on your tax returns.
MORTGAGE LOAN INTEREST DEDUCTION The mortgage interest deduction is the most significant perk for homeowners. It's no surprise that numerous housing and tax reforms have proposed adjustments to this deduction. In the initial years of a mortgage, the majority of each monthly payment goes towards interest, and taking advantage of this deduction can result in substantial savings. You can deduct all the interest paid on loan balances up to $750,000, i.e., if your loan balance is $1 million, you can only deduct the interest charged on the first $750,000. Keep in mind that the interest paid on a home equity line of credit (HELOC) or a second mortgage is also tax deductible with two caveats:
The HELOC or second mortgage must have been secured to buy, build or improve a home. If you took a HELOC or second mortgage to consolidate debts or take cash out, this would make the interest paid non-deductible.
The $750,000 max includes the balance on the HELOC (or second mortgage) + the balance on the first mortgage.
MORTGAGE LOAN POINTS PAID
In addition to deducting interest, you can also deduct the "points" paid on your mortgage for your primary residence (including home equity loans). These points represent a percentage of your loan amount that you pay upfront at closing to lower your interest rate.
PROPERTY TAXES
Property taxes are also deductible, allowing you to deduct taxes on your taxes! The maximum property taxes you can write off (on your Federal returns) is currently (as of 2023) set as $10,000. As an example, if your property taxes per year total $11,450, you can only deduct the first $10,000 of them. Remember that if you file married and separately, you can only deduct $5,000 each. Refer to your local state tax rules around this topic, as some states will allow you to deduct greater than the $10,000 that the Federal Government allows.
HOME-BASED BUSINESS
If you have a home-based business, there is a tax break available for the home office deduction, although it can be complex to calculate, it may be worthwhile. You can deduct some of the expenses associated with maintaining the space used for a home office. Keep in mind that this deduction is not applicable to working from home for an employer, it is only applicable if you are running your OWN business from home.
ENERGY-EFFICIENCY DEDUCTIONS
For energy-efficient home improvements such as new windows, energy-efficient HVAC systems, insulation, etc., you can claim a 10% rebate on your taxes, up to $500. This rebate can be especially significant if you install a solar system.
MEDICAL IMPROVEMENTS TO HOME
If you need to make medically necessary improvements to your home, such as adding a chair lift or a wheelchair ramp, you can save on taxes. However, the deduction is limited to the portion of your medical costs that exceed 10% of your adjusted gross income (or 7.5% if you are 65 or older). Additionally, the deduction is usually limited to the difference between the cost of the improvement and the increase in home value resulting from it. Certain income requirements must be met for some deductions, even if the improvement adds no marketable value to the home (e.g., widening doorways for wheelchair accessibility).
SALE OF HOME
When you sell your home, there are potential tax deductions available. Real estate agent fees, advertising costs, and title insurance expenses related to the sale may be deductible. Additionally, any improvements made to the home prior to selling could be eligible for deductions.
NATURAL DISASTERS In the event of a natural disaster, if you're uninsured and the damages exceed 10% of your annual income, you may be eligible for deductions.
Ultimately, being a homeowner has its financial benefits. Aside from building wealth and security for your family, owning a home can alleviate some of the pain associated with tax season.