Buying a home is usually the single biggest purchase most of us make in our lifetimes. And while there are many benefits to owning a home, they may differ for everyone. As Pat Kuether, President of Mortgage Services at Sibcy Cline, points out, “A first time borrower might be looking to build wealth and find that perfect home to raise a family; A baby boomer might want the sense of comfort and security that comes with owning your own home, while the corporate transferee might see it as a transitional commitment.”
While everyone is different, there is one benefit to home ownership for all of us. “In all of these examples, the fact that you can take advantage of the tax deduction is a huge benefit,” says Pat.
Many buyers, especially first-time buyers, don’t always see the tax benefits right away. “Most buyers only the see from the perspective that [buying a home] is a place to live ‘at cost’. As a financial planner, I feel it is my job to communicate the financial benefit,” says Damon DiBari, Loan Officer and Certified Financial Planner at Sibcy Cline Mortgage Services.
Tax Benefits to Claim on Your Tax Return
The tax benefits of homeownership are significant, and knowing what benefits are available to you will help you get the most money back on your taxes this year. We’ve compiled a list below for your reference.
1. Mortgage Interest
This is the biggest tax benefit you will receive for being a homeowner. Every homeowner who is married and filing jointly who has a mortgage up to $750,000 can deduct the interest paid on their loan. Single filers can write off up to $375,000. You may also be able to deduct the interest on a home equity line of credit of up to $100,000 when it is used to purchase or make improvements to your home.
If you purchase home from $150,000 to $250,000, you will pay about $6000-$10,000 in mortgage interest in the first year, and you will be able to then deduct that against your income. The larger the mortgage, the larger the deduction becomes.
Here’s how it works: You will receive a 1098 form from your lender which lists the mortgage interest you paid. You can use the amount on this form on Schedule A of your 1040 to deduct from your taxes owed.
2. Property Taxes
The latest rules for property taxes (a.k.a. real estate taxes) allow you to deduct up to $10,000, which includes both state and local taxes.
If you paid your taxes directly, you will need to keep receipts and copies of checks to claim this deduction. When you pay through an escrow account with your lender, the total will be on your Form 1098.
3. Mortgage Points
When you take out a mortgage, it is common to pay “points” to the lender in order to reduce your interest rate. Paying these points is another tax benefit of being a homeowner since they are also tax deductible.
You will need to check with your lender to evaluate your mortgage payment and see if you qualify for this deduction. For example, if your monthly payment includes $200 for points, your deductible would be $2,400.
4. Private Mortgage Insurance
When you don’t put 20% down on a home, lenders require that you buy private mortgage insurance (PMI). Although this is an added expense to your mortgage, you can claim it as a deduction.
There are a couple of guidelines for this deduction. The first is that your mortgage must have been taken out after 2007. The other is that you can’t claim this deduction if your income is over $100,000 if you are married or over $50,000 if you are single.
5. Energy-Efficient Upgrades
Going green can get you rewards when you own a home. Under the residential energy-efficient property credit, IRS has made upgrades that conserve energy a tax credit for homeowners. You can be credited up to 30% of the cost of your upgrades.
To get this credit, you must make improvements (such as solar energy panels) to your home that increase its energy efficiency. For a full list of eligible improvements, you can visit energystar.gov.
6. Home Office Expenses
Although many of us worked from home this past year, this benefit is only available to self-employed workers and the guidelines are strict. If you qualify, you can deduct up to $5 per square foot for up to 300 sqaure feet of office space—a maximum deduction of $1500.
Included in this deduction are other expenses such as your electric bill, internet bill, and computer equipment.
7. Capital Gains from Selling Your Home
One last benefit of homeownership comes when it is time to sell. You are not required to pay taxes on the profit you make when you sell your home, up to $500,000 if you’re married and $250,000 if you’re single.
There are some guidelines around this benefit that are worth checking out, but most homeowners will not have to pay any taxes on their profits from selling. This is a huge benefit and allows homeowners to use the money on the purchase of a new home if they choose.
Help with Claiming Your Tax Benefits
Figuring out which tax benefits you qualify for and what documentation you need can be confusing and frustrating. “Our number one goal is to communicate with homeowners to help with their taxes. We promote a proactive approach by reaching out in February and March to ensure the documentation and information are received and understood,” says Damon.
“We take pride in having the background to be an advisor for our clients as part of their trusted team,” Damon says. If you have any questions regarding your tax benefits related to home ownership, get in touch with a loan officer with Sibcy Cline Mortgage Services for assistance.