There are many tax benefits of owning a home. However, many first-time buyers don’t know them. This article lists nine of the most common benefits to help you save money and make the most of your investment.
1. Imputed Rent Exclusion
When you buy a home, you don’t have to pay rent to live in it. In other words, you’re landlord and tenant at the same time. This means the rent you would pay for a residence like yours (also called imputed rent) gets excluded from your total income.
2. Mortgage Interest Deduction
You can reduce your taxable income by deducting the interest on your mortgage debt. However, you can only deduct interest on your primary residence, secondary home, or a mortgage that your home secures.
The Tax Cuts and Jobs Act (TCJA) reduced this tax benefit a few years ago. Before the TCJA, you could deduct interest paid on up to $1 million of mortgage debt and up to $100,000 of home equity debt. Now, the act limits deductions up to $750,000 of the mortgage debt by a married couple filing together.
You’ll probably see higher tax benefits when itemizing deductions early in your homeownership. This is because you pay less mortgage interest over time, although property taxes may increase.
3. Property Tax Deduction
A third homeowner tax benefit is a property tax deduction. You can reduce your tax bill by deducting local and state property taxes as you pay them. Property tax deduction saved US homeowners about $6 billion in income taxes three years ago.
Recently, the TCJA limited property tax deductions to the following:
- $10,000 a year for a married couple filing together
- $5,000 if you’re married and filing separately
- Either property taxes and state sales taxes or property taxes and state and local income taxes
4. Moving Expenses
You can get tax deductions on moving expenses if you’re an armed forces member. Tax deductible moving expenses apply when you must move due to changing stations while on active duty. You and your family could deduct expenses related to the following:
- Transporting and storing items
- Traveling to your new residence
- Lodging while on the road
5. Mortgage Credit Certificates
Your state’s Housing Finance Agency (HFA) could deem you eligible to receive a mortgage credit certificate. They only offer these to low-income, moderate-income, and first-time homeowners; these tax credits are nonrefundable.
If you’re unsure about buying a new home, don’t worry – you’re not alone. Check out our FAQs page to find answers and proceed with confidence.
6. Green Energy Initiatives
Energy efficiency is one of the most common tax benefits of owning a home. You could be eligible for substantial tax breaks if you improve your home using green energy and eco-friendly solutions. You may receive nonrefundable tax credits for initiatives like:
- Adding solar panels
- Installing small wind turbines
- Using geothermal equipment
7. Medical-Related Home Improvements
You could receive a tax break if you have to renovate your home for medical reasons. Many medical-related home improvements fall under tax deductions for medical expenses and could save you money. Necessary improvements that would qualify for tax deduction include:
- Installing wheelchair ramps or lifts
- Modifying doorways and stairways
- Adding warning systems
- Constructing railings
8. Home-based Business Deduction
You may wonder, “Do I qualify for home office deductions if I work remotely?” The short answer is no. However, you could get tax deductions if you’re a small business owner who uses your property for business operations.
Home office or home-based business deductions apply to several types of home expenses. These include:
- Repairing your primary residence
- Maintaining a security system
- Using utilities
- Paying real estate taxes
9. Home Sales
The Internal Revenue Service (IRS) typically takes a percentage of everything you earn. However, you could make a lot of tax-free profits when you sell your home. You’ll want to keep track of home improvement and maintenance costs to minimize capital gains tax.
If you’re married, you won’t have to pay taxes on the first $500,000 you make on a home sale ($250,000 if you’re married, filing separately). Capital gains tax exemption guarantees this, allowing you to save more money than if you simply deducted.
Need Help With Your Home Loan? Contact Cape Coral Mortgage
At Cape Coral Mortgage, we have over 20 years of industry experience. We help clients through the buying process and ensure they understand all the tax benefits of owning a home. Call us at (239) 540-5555 to get started today.