Tax Breaks for Homeowners and Buyers

A man walks along a street in a neighborhood of single-family homes in Los Angeles, Calif., on July 30, 2021. Frederic J. Brown/AFP via Getty Images

A house is many things to people. It’s a place of safety and comfort for many. To others, it’s a place for family. But it could also be a place to save some money on your taxes. There are several deductions you can take using your house.

When you hear the word “deductions,” you think of lower taxes. This may not be the case. You need to look at the big picture. Home deductions may not be for everyone.

Mortgage Interest Deduction

If you itemize, you should take advantage of the mortgage interest deduction. You can lower your tax liability by itemizing the interest you paid on your mortgage.

Before the Tax Cuts and Jobs Act (TCJA), homeowners could deduct up to $1 million in mortgage interest. But the TCJA changed that to $750,000 for a married couple filing jointly.

Home Equity Loan

If you have a home equity loan, you have a second mortgage on the house. But with a home equity loan, you can tap into the equity you’ve built in your home as collateral to borrow against.

You must pay interest on a home equity loan just like a home mortgage.

The TCJA changed how a home equity loan’s interest could be deducted. If you take the home equity loan out to pay for home improvement, you can deduct the interest from your taxes.

However, under the TCJA, you cannot deduct the interest if you took out a home equity loan for any other reason, like paying off credit cards. It must be used for the house.

Limited Home Improvement Deductions

Home improvement deductions are somewhat ambiguous. They must be defined as “necessary.” But an upgrade to an out-of-date kitchen isn’t considered necessary.

However, if you make permanent improvements for medical reasons, that should qualify; these include:

• installing medical equipment
• widening doorways to make a home accessible
• installing railings

Other than for accessibility and medical reasons, it’s difficult to meet the “necessary” definition.

Mortgage Insurance Deduction

Private mortgage insurance (PMI) is often required for conventional loans when the downpayment is less than 20 percent of the purchase price. It is also required when refinancing a conventional loan when equity is less than 20 percent of the home’s value. The PMI protects the lender.

The premium is a monthly premium added to your mortgage payment. Sometimes, the PMI is paid with a one-time upfront premium at closing, and sometimes, it’s partially up front with monthly payments.

It’s an expense that needs to be factored into a monthly budget. But the good news is that PMI payments can be deducted from your itemized return.

Capital Gains Tax Break

Capital gains come into play if you sell your house for a profit. The capital gain is the difference between the house’s value when you buy it and the increased value when you sell it.

In most situations, you pay capital gains tax. But sometimes, you’re given a break on capital gains on a primary residence.

If you have lived at your primary residence for two of the last five years, you could keep some profits without a tax liability.

A married couple filing jointly can keep up to $500,000 in capital gains, and a single filer can keep up to $250,000 in capital gains without a tax obligation.

The Internal Revenue Service (IRS) is particular about living in the primary residence for two of the five years, so be aware of that rule.

Property Tax Deduction

Homeowners face property taxes on a state and local level. The IRS allows you to deduct up to $10,000 of property taxes for a married couple filing jointly. A single filer can deduct property taxes up to $5,000.

Tax Deduction for Buying a Home

It’s exciting to buy a home, but paying all the money involved can quickly burst the bubble. Unfortunately, you can’t take many deductions unless you’re a first-time buyer.

According to the IRS, there is a refundable credit equal to 10 percent of the purchase price up to a maximum of $8,000 for married couples filing jointly. Singles filers have up to $4,000.

To be a first-time buyer, you must not have owned any other principal residence for three years before the date of purchase of the new residence.

If you’re not a first-time buyer, the only way you’ll receive a new homebuyer’s deduction you may qualify for is if you purchase prepaid mortgage points.

But there are many qualifications you must meet to earn this deduction. One is that you can’t borrow money from your lender to pay for the points. Another is that the points paid weren’t more than the amount usually charged in your area. There are more, so talk to an accountant before buying points to earn a deduction.

Deductions Only Work When Itemizing

The only way you can use your home to lessen your tax liability is if you itemize. But many people don’t itemize anymore. Instead, they take the standard deduction.

For 2023, the standard deduction is $27,700 for married couples filing jointly. And it’s $13,850 for single filers. Heads of households have a deduction of $20,800.

This large standard deduction is the result of the TCJA. But it sunsets Dec. 31, 2024. At that point, itemizing may come back in vogue, and when it does, use your house to lower your tax bill.

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