Owning a home can help an individual save money by offering them tax breaks by utilizing certain itemized deductions from their income tax. If an individual is renting a home, they cannot deduct taxes paid on that property.
Taxes paid on a property can only be deducted by the property owner who actually pays the taxes for the property. There are several ways an individual can take advantage of tax breaks by purchasing their home instead of renting it.
- The interest paid on the home loan, or mortgage;
- Private mortgage insurance (PMI);
- Points; and
- Property or real estate taxes.
The interest paid on a home improvement loan or an individual’s first or second mortgage loan is tax deductible up to a maximum amount of $1,000,000. This particular deduction is limited to a maximum of 2 residences that have mortgages. However, rental and business properties are not counted towards that limit.
An individual may not be eligible for this deduction if their aggregate mortgage balance is more than $1,000,000 or, if married and filing taxes separately, $500,000. However, an individual cannot use the $1,000,000 deduction if they paid in case for their home and used it at a later time for collateral for an equity loan.
An individual may also be able to deduct some of the interest paid on their home equity loan. An individual may deduct the lesser amount of $100,000 or the total of their home’s fair market value, or what their house would cost on the open market minus other debts against it. If the individual is married and filing separately, the amount is $50,000, not $100,000. The IRS limits the amount of debt an individual can consider home equity for this deduction with very complex rules.
In some cases, an individual may be required to pay for private mortgage insurance (PMI) when they purchase their home. PMI is often required when a home buyer borrows more than 80% of the purchase price of the home.
PMI premiums for mortgages that were taken out after 2006 have been tax deductible for homeowners who itemize their deductions for 20 years. However, this expired in 2016 and was only extended through 2017.
It is important to note that, as of 2020, this deduction was reinstated for 2020 and future tax years. It is also important to note that this deduction is only available if the taxpayer itemizes their deductions.
Once the homeowner reaches 20% equity in their home, they may be able to cancel the PMI and remove that amount from their monthly payment. The mortgage servicer is required to remove the PMI once the loan balance reaches 78%.
If an individual’s PMI premium is deductible, the amount of that deduction depends on their income. If their household earnings exceed $100,000 per year, then the deduction begins to phase out. This phase out begins at $50,000 per year if the individual is married but filing separately. An individual will receive no deduction if they are earning more than $110,000 per year or $55,000 per year if married but filing separately.
Points are certain charges an individual pays to get a home mortgage. Points are also known as:
- Loan origination fees;
- Maximum loan charges;
- Loan discount; or
- Discount points.
A point is 1% of an individual’s loan principal. A home loan is typically associated with 1 to 3 points, which may total thousands of dollars.
An individual can fully deduct any points associated with a home purchase mortgage. The points will be deductible over the life of the loan if they were paid to refinance a mortgage.
Typically, an individual’s state or local government will charge a tax, called a real estate or property tax, once an individual owns a piece of real estate. These taxes are fully deductible from an individual’s income. The tax an individual is charged must be for the welfare of the general public or for a public service.
Can I Count Moving Costs as a Deductible?
If an individual moves because they obtained a new job, they may be able to deduct some of their moving costs. to qualify for these deductions, an individual must meet all of the following requirements:
- The individual is required to move within one year of starting their new job;
- The distance between the individual’s old home and their new job is at least 50 miles greater than the distance between their old home and old job;
- The individual must work full-time at the new workplace for 39 of the 52 weeks following their move. If the individual is self-employed, they are required to work full-time for at least 39 weeks during the first 12 months and a total of 78 weeks during the first 24 months after arriving at their new job location;
- The distance between the individual’s new home and their new job cannot be greater than the distance between their old home and their old job. In other words, an individual cannot make their commute longer than if they had not moved. An exception applies if their new commute will save them time or money, or if their employer insisted on the move as a condition of their employment.
If an individual meets the requirements listed above, they can deduct the expenses of:
- Moving their household goods;
- This includes in-transit or foreign-move storage expenses;
- Moving their personal effects; and
- Travel expenses to get to their new home;
- This includes lodging but does not include meals.
Are there any Tax Benefits an Individual can Get From Selling Their Home?
Yes, there may be tax benefits available if an individual sells their home. In some cases, they may be able to exclude the profit they made from being taxed.
In order to be eligible for this deduction, an individual must have owned and lived in the property as their main home for at least 2 years during the 5 year period that ends on the date the home is sold. A home may include:
- A house;
- A houseboat;
- A mobile home;
- A cooperative apartment; and
- A condominium.
If the individual is a married taxpayer filing jointly, they may keep up to $500,000 in profit from the sale of their home. If the individual is single or married and filing separately, they can keep up to $250,000 tax free. This also applies if the individual is single and owns the home jointly.
Are There any Other Possible Tax Benefits to Home Ownership?
Yes, there may be other available tax benefits to home ownership. For example, if an individual uses a portion of their home exclusively for business purposes, they may be able to deduct home costs related to that portion. This may include a percentage of insurance and repair costs, as well as depreciation.
Do I Need a Tax Attorney to Get Tax Benefits?
It is important to have the assistance of an experienced tax attorney to ensure you are getting all of the tax benefits that are available to you. The IRS has published literature regarding tax benefits on their website, but many of the rules are complex and contain many exceptions.
An attorney will be able to determine what benefits and exemptions you are eligible to receive. Your attorney can help you fully take advantage of owning your home for tax purposes.