Purchasing your first home is one of the largest decisions you will make. There are many processes involved such as the home search, securing your loan, and the insurance and documentation that comes with it all.
Throw in tax season and it can easily become overwhelming. The good news is, having the right real estate professionals on your side can ease these worries.
Read further and by the end, you will be a tax pro!
First things first
To gain an understanding of the tax perks homeownership brings, you will need to know about the Tax Cuts and Jobs Act that went into effect on January 1st of 2018.
This tax code put several changes into effect mostly based on the new corporate tax rate of 21%. Standard deductions were raised for both single and joint filers.
What about tax perks for homeowners? Let’s break those down.
Investopedia states “The law limits the application of the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt, down from $1,000,000 under the old law, but up from $500,000 under the House bill. Mortgages that are taken out before Dec. 15, 2017, are still subject to the current cap. The change expires after 2025.”
The more recent your mortgage, the greater your tax savings are. This is because the way your mortgage amortizes makes your first payments mostly interest.
To take the mortgage interest deduction, you would have to itemize your deductions. For this to benefit you, your itemized deductions would have to be more than your standard deduction.
Standard deductions have nearly doubled with the Tax Cuts and Jobs Act, so it will likely be more common this tax year for taxpayers to take their standard deduction.
If you have a mortgage, your property taxes are likely built into your monthly payment.
Just like your mortgage interest, your property taxes are also an itemized deduction that must add up to more than your standard deduction.
You may deduct up to $10,000 for those married filing jointly, or $5,000 filing separately.
Private mortgage insurance
Odds are you are paying for private mortgage insurance (PMI) if you put less than 20% down on your home.
This tax deduction is set to expire after 2020, but for now, you can deduct the interest paid on your PMI.
Again, this is an itemized deduction.
Other homeowner tax breaks
There could also be some attractive tax breaks for:
- Energy efficiency updates (This is a certain percentage credited back to you versus an itemized deduction, but dependent upon which upgrade you have installed and when)
- Being self-employed with a home office (You can deduct $5 per square foot, up to 300 square feet, of office space, which amounts to a maximum deduction of $1,500)
- Home equity line of credit loan interest (you can only deduct this interest if the loan was used for home improvements or to buy or build a property)
There are all kinds of tax perks available to homeowners. Hopefully, this guide was a helpful starting point. Always remember that it is most useful to take the largest deduction. Your itemized deductions may not outweigh your standard deduction.