Owning a home comes with its fair share of expenses, but it also offers a tax advantage that renters don’t have. Homeowners can use various deductions to help lower their tax bill. Here are four key tax deductions to keep in mind.
- Mortgage interest deductions: According to the Tax Cuts and Job Act (TCJA), you can reduce your taxable income by deducting the interest you pay on your mortgage if you itemize your deductions. Since 2017, you can deduct the interest you pay on up to $750,000 of your mortgage debt for buying or improving your home. You can also deduct the interest on up to $100,000 of home equity debt as well.
- Property tax deductions: Another advantage of itemizing your tax deductions is that you can also claim your property tax for your home on your return. This deduction aims to reduce the burden of property taxes for constituents without reducing property tax revenue.
- Imputed rent deductions: As a homeowner, you no longer have to pay rent because you own your property. This benefit is known as imputed rent and it’s basically the return you get for homeownership, you get to live in your home rent-free. The advantage of imputed rent is that it is excluded from taxable income. However, if you choose to rent out your home, you must pay taxes based on the income you receive as a landlord.
- Home sale profits deductions: If you plan on selling your home, you may benefit at tax time, provided you don’t qualify for capital gains taxes. Profit generated from the sale of a home up to $250,000 is excluded from taxable income. Over that threshold, you’ll likely qualify for capital gains taxes.
Check for home tax credits, too!
Tax credits differ from deductions because they offer a dollar-for-dollar reduction. You also have to qualify to meet certain tax credits. For example, you can claim your home office space on your tax return if you work from home. You have to calculate the amount of space and energy usage against your overall home expenses, but you can have that portion reduced from your home tax burden. Similarly, other tax credits for energy efficiency upgrades, home renovations, and more are available depending on local state regulations. Some credits are fully refundable, while others are only partially or nonrefundable, so you may be limited in how much of a refund you receive on your taxes.
Owning a home can be a great advantage at tax time. If you work with an experienced accountant, you can save a lot when you file your taxes as a homeowner compared to a renter. So do your due diligence and research your local and state tax laws to see what you can save when you file your taxes as a homeowner!
