The tax reforms implemented by President Trump and the United States Congress at the end of 2017 had a profound impact on people’s financial obligations to the federal government.
While the reforms are still being debated, with people on either side claiming they are good or bad for the country, one truth remains constant: there are (as there were before) significant tax benefits of homeownership, including tax benefits that come simply by having a mortgage.
The Tax Benefits of Homeownership: 2020 and Beyond
Note: We are NOT Tax Professionals
San Diego Purchase Loans is in no way a tax expert or tax advisor. This article is for general information only and should not be considered tax advice. Always seek the guidance of a qualified professional before making any decisions on your taxes.
1. Deducting Mortgage Interest
Of all the tax benefits that come from owning a home, this is often the largest, but it’s only available to those who have a mortgage. While you can’t deduct a percentage of your total mortgage payment, you can deduct a percentage of your interest payments.
If you have a loan that went into effect before December 15th, 2017, you can deduct interest on loans up to $1 million. But loans issued after that date are treated differently, as you can only deduct interest on debt up to $750,000. Still, this continues to be a major benefit for homeowners, and the more recent your loan, the more you save, as mortgage payments are usually front-loaded with interest as opposed to principle.
2. Property Taxes
When you pay state or local property taxes, you can deduct a portion of these payments from your federal taxes. However, this deduction is capped at $10,000 for married couples filing jointly.
Taxpayers have the option of taking one deduction of $10,000. However, if property taxes are on an itemized list, they must add up to more than the standard deduction, which is $24,000 for a married couple.
3. Private Mortgage Insurance
Many homeowners, especially those with mortgages and less than 20% equity, will often pay mortgage insurance of some kind. Essentially, this is an additional cost that supports an insurance policy; in the event of financial troubles on the part of the borrower, the insurance will compensate the lender. This benefits the lender, but it also increases the likelihood of mortgage approval.
Mortgage insurance can cost anywhere from .3% to 1.15% of the home loan but you can deduct this cost from your taxes.
This is an itemized deduction, but if you can use it, it may help push you over the $24,000 standard deduction. If you make $100,000 annually and purchase a home for $200,000 with a 5% downpayment, you will pay about $1,500 in mortgage insurance and thereby reduce your tax burden by $1,500. It’s not budget-breaking, but certainly a tax benefit worth utilizing!
4. Deductions for a Home Office
According to information released by the most recent U.S. census, approximately 5.2% of all workers in the United States work from home, either for themselves or an an employee. This rise, of course, is driven by the rise in mobile technology and internet access, and it has created profound benefits for lifestyle, workforce affordability, and more.
But many are not fully utilizing the potential tax breaks, including the deduction for home offices. In most cases, you can deduct about $5 per square foot of workspace, up to roughly 300 square feet, which comes to a potential $1,500 in deductions. There are, however, strict rules for this tax benefit, and the space must be fully used for work, not a shared personal/work space or simply a desk in the living room.
5. Property Upgrades that Allow You to Stay in the Home
If you are at the point in your life when you may need to move into an assisted living facility, but have instead chosen to make upgrades to your home that allow you to stay in place, you can likely use these revisions as a tax deduction.
To use this tax benefit, the home improvements need to exceed 7.5% of your the adjusted gross income. This means that if you make $100,000, the deduction kicks in only after you spend $7,500. So if you make $100,000 a year and spend $10,000 on home upgrades, $2,500 of the expenses could be put towards your deduction.
6. Interest on a HELOC
Just like interest on your mortgage, you can also use interest on your Home Equity Line of Credit, or “HELOC,” as a deduction. However, the interest is only usable as a tax benefit if it goes towards improving the home; if you use it for other means it likely won’t be deductible.
7. Withdraw from IRA for Downpayment with No Tax Hit
This is not actually a deduction or credit for taxes, but homeowners who take money out of their IRA to fund a downpayment can often do so without the typical penalties. Certain limitations apply, and you have to have owned the account for at least five years to use these benefits of homeownership.
Be careful, as taking money out of a retirement account can come with penalties if not done properly. It’s especially important that you speak with a professional before making this step.
8. Own an Asset with Lighter Gains Penalties
This is not related to buying a home, but is instead connected to selling a home, a benefit that you will (most likely) realize at some point in your life. Taxpayers who sell high-value assets for profit, such as stocks or materials, must pay capital gains taxes. But this is significantly reduced for homeowners selling their main property.
To use these benefits of homeownership, you will have to have used the home as your principle residence for two of the previous five years, and you cannot have used the capital-gains exclusion for homes in the previous two years.
Get a Wonderful Loan So You Can Enjoy the Benefits of Homeownership
While we may not be tax experts, we are certainly mortgage experts. Contact our staff and let us help you choose the right loan for your specific needs.
Whether you are purchasing your first house or want to add to your investment-property portfolio, we can help make your dreams a reality!
“Hey Chad, Just wanted to send a quick note to Thank You for all your work and effort to get this escrow closed. It was a pleasure to work with someone as professional as yourself. If I have a client that ever needs a lender you will definitely be someone that I would recommend.”
“Chad Baker is THE BEST, most professional, understanding, HONEST person I’ve ever worked in the mortgage industry. He knows exactly what he’s talking about, will never promise something he can’t deliver, and will bend over backwards to get you what you need. I had a very unique problem qualifying and every other mortgage company I worked with assured me from the beginning that they could get me financed, and then it would all fall apart once we hit underwriting. Chad understood my circumstance from the beginning and patiently explained every step of the way. I can’t thank you enough Chad! Juliann has been great keeping me updated and making sure that everything comes together in a timely fashion. She also appreciates my sense of humor, which gives personality to a boring funding process. Thanks Juliann! I HIGHLY recommend Home Point and if I ever buy another home, will absolutely use them again.”
I was referred to Chad by my Realtor for a purchase of a new house. The experience with Chad and the team (I mainly worked with Juliann) was nothing short of outstanding. From start to finish there were always quick to respond and when needed, notify me of any new documentation that was required. There were very helpful explaining to me the pros and cons of different financing options as well as some other loan related issues, such as termite clearance outside the purchase contact and septic tank certification process. Overall, very knowledgeable and processional team. Loan preapproval was done in a single day and loan documents were ready for signing in 21 days, which was 9 days ahead of schedule. That never happened to me before.