A person can save money by owning property because they can take advantage of tax savings by using specific itemized deductions from their income tax. A person cannot deduct the taxes they paid on a home that they are renting.
Only the owner of the property who actually paid the taxes on it is eligible to claim a deduction for those taxes. There are various methods for someone to benefit from tax benefits by buying their property rather than renting it.
- The amount of interest paid on the mortgage or house loan;
- PMI (private mortgage insurance); and
- Property taxes.
Tax deductions for interest paid on first or second mortgages for individuals, home renovation loans, and home equity loans are all capped at $1,000,000. This specific deduction is only permitted for up to two mortgaged homes. Rental and commercial properties are excluded from that cap, though.
If a person has a total mortgage balance of $500,000 or, if they are married and paying separate taxes, $1,000,000, they may not be qualified for this deduction. However, if a person paid cash for their property and later used it as collateral for an equity loan, they are not eligible for the $1,000,000 deduction.
The interest paid on a home equity loan can also be deductible to some extent. The lesser of $100,000 or the total of the home’s fair market value, which is what the house would sell for on the open market, less other obligations against it, may be written off by an individual. If a married person files a second tax return, the amount is $50,000 rather than $100,000. The IRS has very complicated rules that place a cap on the amount of debt that a person can deduct against their home equity.
A person could occasionally have to pay for private mortgage insurance (PMI) when buying a home. When a house buyer borrows more than 80% of the home’s price, PMI is frequently necessary.
For 20 years, homeowners who itemize their deductions have been able to deduct PMI premiums for mortgages that were obtained after 2006. However, it was only extended through 2017 and terminated in 2016.
It is significant to note that beginning in 2020, this deduction will be available for use in 2020 and subsequent tax years. It’s also vital to remember that the taxpayer must itemize their deductions in order to qualify for this deduction.
The homeowner may be able to cancel the PMI and eliminate that sum from their monthly payment after they have 20% equity in their home. Once the loan balance reaches 78%, the mortgage servicer must cancel the PMI.
If one is, the amount of the deduction for a person’s PMI premium is determined by their income. The deduction gradually phases out if their household income exceeds $100,000 annually. If the person is married but filing separately, the phase-out starts at $50,000 annually. If a person earns more than $110,000 a year or $55,000 if they are married but filing separately, they are not eligible for any deductions.
A person must pay points in order to obtain a home mortgage. Loan origination fees, maximum loan charges, loan discounts, or points are other names for points.
Points of Discount
One percent of the loan principal is one point. Typically, 1 to 3 points, which could be worth thousands of dollars, are added to a house loan.
Any points incurred by a mortgage for the acquisition of a home are entirely deductible. If the points were paid to refinance a mortgage, they would be deductible over the course of the loan.
Once a person owns a piece of real estate, their state or the local government will typically levy a tax known as a real estate or property tax. An individual may deduct all of these taxes from their income. The tax must serve the public good or public service that an individual is subjected to.
Do Moving Costs Qualify as a Deductible?
A person may be eligible to write off some of their moving expenses if they move because they got a new job. A person must satisfy each of the following conditions in order to be eligible for these deductions:
- The person must relocate within a year of beginning their new work;
- The individual must work full-time at their new employment for 39 of the next 52 weeks;
- The distance between the person’s old house and their new job is at least 50 miles larger than the distance between the person’s previous home and old job. The distance between the person’s new home and their new job cannot be greater than the distance between the person’s old home and their old job.
- If the person is self-employed, they must 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. Therefore, no one can make their commute longer than it would have been if they had not moved. If their new commute will save them time or money or if their company requires the transfer as a condition of employment, there is an exception.
If a person satisfies the criteria outlined above, they are eligible to claim the following expenses as a tax deduction:
- Moving their household goods, which includes in-transit or international move storage costs;
- Moving their personal things; and
- Travel expenses to arrive at their new residence.
While housing is included, meals are not.
Are There Any Tax Advantages for Selling a Home for an Individual?
Yes, there might be tax advantages if someone sells their house. They could avoid paying taxes on the profit they made in some circumstances.
An individual must have owned and occupied the property as their primary residence for at least two years during the five years ending on the day the home is sold in order to qualify for this deduction. A house, houseboat, mobile home, cooperative apartment, and condominium are all examples of homes.
The person may keep up to $500,000 of the profit from the sale of their home if they are a married couple filing jointly. The individual can keep up to $250,000 tax-free if they are unmarried or married but filing separately. This is true even if the person is the sole owner of the house.
Are There Any Additional Potential Tax Advantages to Homeownership?
Yes, there might be further tax advantages to homeownership. For instance, if a person utilizes a specific area of their house solely for work, they could be able to write off the costs of that area of the house. This could comprise a portion of the price for insurance, repairs, and depreciation.
Is a Tax Attorney Required for Tax Benefits?
To make sure you are receiving all of the tax benefits that are available to you, it is crucial to have the support of an expert tax attorney. The IRS’s website includes information about tax benefits, but many of the laws are intricate and have numerous exceptions.
What perks and exemptions you are entitled to will be determined by a lawyer. Your lawyer can assist you in maximizing the tax benefits of owning a home.