Did you know that if you own your own home, you may be eligible for certain homeowner tax benefits?
Tax deductions are just one of the many benefits of owning your own home.
Keep reading to learn more about the tax breaks for homeowners, the difference between tax benefits and tax deductions, and most importantly—our top five benefits.
What are the tax benefits of homeownership?
Purchasing a home is an exciting and life-changing journey, and there are many factors to consider, including how it affects yours taxes.
Your available benefits can depend on numerous factors, such as how long you’ve owned and lived in your home, if you’ve sold your home, or made any improvements.
It can also depend on your mortgage, which is good to know as you’re shopping for your home and loan.
Some of these deductions can even reduce your taxes by thousands of dollars.
If you’re looking to purchase a home, understand the steps involved so you can prepare yourself for what’s expected of you.
It would also be helpful to speak with a lending professional and a tax advisor to understand further which benefits you may be eligible for.
Tax credits vs. tax deductions
The main difference between a tax credit and a tax deduction is that a deduction reduces the amount of income you owe on and a tax credit is taken directly from your taxes.
You can think of a tax credit as a dollar—for every credit you gain, your tax is reduced by that amount. For example, if you have 5,000 in credit, your tax return would be reduced by $5,000.
A tax deduction is what is subtracted from your income before calculating the taxes.
You can figure out your potential savings by multiplying your deduction amount by your marginal tax rate. Your marginal tax rate is the additional tax you pay for every additional dollar of income you make and is based on the income bracket you’re in.
For example, if you qualify for a $5,000 deduction and have a 12% tax rate, you would have $600 worth of deductions from your taxes.
Check your mortgage optionsTop 5 tax benefits of homeownership
Now that we’ve gone over the basics of tax credits and deductions, let’s look at how owning your home affects your taxes specifically.
Mortgage interest deduction
One of the best ways for homeowners to save on their taxes is to deduct mortgage interest. If you have a mortgage, then you can deduct the amount of interest you’ve paid on your mortgage for that year.
You’ll have to itemize your taxes, but you can also deduct interest on any debt used to purchase, build or improve your first or second home.
If you plan to make home improvements, speak with a lending professional to ensure which improvements qualify for tax deductions.
Property tax deduction
You can deduct the amount you pay on your state and local taxes on your property if you’re eligible for a federal tax return.
By itemizing, homeowners can deduct up to $10,000 depending on how they file. For example, the limit is $10,000 for married couples filing jointly and $5,000 if you’re married filing separately.
Home improvement deductions
If you’ve made any improvement on your home, it’s possible that what you’ve spent can be deducted.
Deductions for home improvements are in two categories: home repairs and capital improvements.
This can include, but is not limited to:
- Roof replacement
- Window replacement
- Structural upgrades
- Fixing a gutter
- Central air installation
- Installing a swimming pool
- An addition to the home
- Security system installation
Capital gains exclusion
Your home is considered a capital asset; typically, when you sell a capital asset for a profit, you have to pay a capital gains tax.
However, you may be eligible to lower what’s considered taxable income on the profit from the sale of your home if you’ve owned and lived in the house for at least two of the past five years.
The amount varies depending on how you’re filling. So, for example, if you’re married filing jointly, you don’t have to pay tax on up to $500,000 on the profit from selling your home. If you’re single, the limit is $250,000.
Home office deduction
Covid-19 brought many unexpected changes, and one of the more considerable impacts has been the ability to work from home.
It’s a double-win for remote employees; not only do you get to stay in your pajamas all day, but you could also pay less in taxes.
However, it must be your primary place of work, so part-time remote employees may not qualify. You must also use a certain amount of your home as your office space to be eligible.
There are two ways you can determine your deduction.
The more straightforward method is to deduct $5 for every square foot of your home office. While it’s much easier to determine, you can only credit up to 300 square feet.
The more complicated method is to add up all of your home office expenses and multiply that number by the percentage of your home you use to work.
So, for example, if your home office is around 20% of your home’s total square footage, you can deduct about 20% of your home expenses.
While these are our top five favorites, there are many other tax benefits of homeownership available, including:
- Credits for energy-saving improvements
- Rental expenses deduction
- Credits for charging equipment for electric vehicles
- Deductions for medically necessary home improvements
Become a homeowner with GO Mortgage
Now that you’ve learned some of the many benefits of homeownership, you may be ready to take the next step.
Look no further than the experienced lending professionals of GO Mortgage.
Fill out our questionnaire, and we’ll reach out to discuss your homebuying goals.