Home ownership can provide a sense of security, peace of mind, and an emotional attachment. When all your expenses are factored in, though, owning a home can be expensive. On the plus side, owning a home — whether it's a condo, townhouse, or a traditional single-family home — may offer you some specific tax savings as well.
1. Mortgage interest deduction
Deducting mortgage interest is the most well-known tax benefit for homeowners. If you have a mortgage on your home, you can deduct the amount of interest you paid on your mortgage loan during that year, provided you itemize your taxes instead of taking the standard deduction.1 If your itemized deductions are greater than the standard deduction, your taxable income for that year will be lower, which will result in a lower overall tax bill. The maximum mortgage debt you can claim interest on has decreased from $1 million to $750,000 with the new tax laws.2
2. Property tax deduction
Similar to mortgage interest deduction, property tax paid during a particular tax year can also be deducted on your tax return, provided you itemize your taxes. This can ultimately lower taxable income if your itemized deductions are greater than the standard deduction. However, be aware that the property tax deduction was recently capped by the new tax reform laws at $10,000.3
Did you know? You may be able to deduct more than you think when it comes to homeownership and your tax bill!
The home must be the taxpayer's principal residence.
The home must have been the principal residence in at least two of the preceding five years.
The taxpayer must not have claimed this income exclusion for the sale of a different home in the last two years.
4. Home improvements
While you aren't able to deduct the amount you spent on home improvements in the year you spend the money, you should still save relevant receipts. When you ultimately sell your home, some of these costs can be added into what's known as the "cost basis" of your home. For example, if you purchased your home for $300,000 and then spent $25,000 on substantial home improvements, the "cost basis" of your home (for tax purposes) would be $325,000. This is significant because the capital gain you make from selling your home is calculated by subtracting the "cost basis" (what you paid for your home plus what you spent on improvements) from the amount you sell your home for. These receipts could save you money if you make a sufficiently large profit from your home sale to potentially owe capital gains tax.
This article is not meant to provide tax advice. For tax advice specific to your situation, please see a CPA in your locality who can work through your individual circumstances.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
The Balance, "How to Use the Standard Tax Deduction", accessed Jan. 10, 2019
Business Insider, "How Trump's new tax law affects homeowners at every income level from $83,000 to $336,000 a year", accessed Jan. 10, 2019
Business Insider, "Before you rush to prepay your property tax bill, make sure the IRS will allow the deduction", accessed Jan. 12, 2019
TurboTax, "Tax Aspects of Home Ownership: Selling a Home", accessed Jan. 12, 2019
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