Exploring the tax benefits of homeownership
For homeowners to reduce the amount owed at tax time, start by saying goodbye to the standard deduction and hello to itemizing.
Owning a home can be a smart financial investment and a great way to build your equity. But another substantial benefit can involve a bigger break on Tax Day.
Whether you own now or you’re thinking about buying, tax season is the best time to become familiar with the financial benefits of owning a home.
The IRS lists four categories of deductible expenses when it comes to homeownership: home mortgage interest, real estate taxes, sales taxes and mortgage insurance premiums.
Fire and comprehensive insurance coverage, title insurance, depreciation, and the cost of utilities such as gas, electric and water are among the items you can’t deduct. But don’t worry—there are plenty of other ways to reduce the amount you owe Uncle Sam.
Home mortgage interest
The most significant tax break for many homeowners is the ability to deduct mortgage interest. Assuming you took out a loan to buy your primary home, this applies to you. The entire portion of your payment for mortgage interest can be deducted by itemizing on Form 1040’s Schedule A.
Don’t worry about calculating this amount yourself—your lender will send you a Form 1098 in January that lists the mortgage interest you paid the previous year. Deductions can be limited, however, if your total mortgage balance is more than $1 million or you took out the mortgage for reasons other than to buy, build or improve your primary home.
If you paid “points” as you obtained your home loan—this is occasionally done to acquire a lower rate—you can deduct the full amount paid for the year if you meet a variety of criteria laid out by the IRS.
Real estate taxes
As the IRS notes, most state and local governments charge an annual tax on the value of real property. Fortunately, this amount, which varies from state to state, can be deducted. The higher rate your state charges in property taxes, the more you can recoup when filing.
In April 2018, the Chicago Tribune cited a Attom Data Solutions report that Illinois had the second highest average annual effective property tax rate in the United States at 2.13%. At that rate, the owners of a $425,000 condo in Illinois may be able to deduct over $9,000 when filing.
Sales taxes and mortgage insurance premiums
Two other categories that can lead to deductions are sales taxes and mortgage insurance premiums (MIPs). The latter, though, may not be an option for long.
The IRS allows homeowners to deduct state and local general sales taxes. This could include sales taxes paid on your home, as well as on materials used to build it. However, if you elect to deduct the sales taxes paid on your home or home building materials, you cannot include them as part of your cost basis in the home.
Lastly, homeowners can deduct the expense of MIPs that result from buying a property with less than 20% down. However, MIPs paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. And, if your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct MIPs.
OTHER BENEFITS TO CONSIDER
While these cover the basics, there are additional ways that savvy homeowners can take advantage of various provisions, from energy credits to penalty-free IRA payouts for first-time buyers.
If you’re looking for more specifics as you prepare to file, check out Publication 530, Tax Information for Homeowners, courtesy of the IRS.
Guaranteed Rate does not provide tax advice. Please contact your tax advisor for any tax related questions.
You acknowledge that Guaranteed Rate is not a tax adviser company or similarly regulated organization under applicable laws, and does not provide tax advice services. Where available, recommendations, tips and educational materials are provided to you at no additional charge, and for educational purposes only. The services are intended to provide you with general information and assist you with identifying your options. The information is provided only to enable you to make your own choices about your personal finance and is not intended to provide, legal, tax or financial advice. We do not provide any services to advise on your taxes, nor do we provide any representation that the information we provide will actually repair or improve your profile. Consult the services of a competent professional when you need any type of assistance.