Owning a house represents financial stability and success. Even though it is challenging, the many advantages of being a homeowner make it worthwhile. People can financially benefit from deductions in taxes on buying a house. The Internal Revenue Service (IRS) offers many tax advantages to ease homeownership. Learn about some of the financial perks of homeownership below:
Here are some ways you can make the most out of your tax breaks on buying a house, depending on your eligibility conditions.
Homeowners can receive an interest deduction on their home mortgage by itemizing all their last year’s interest payments mentioned on IRS 1098 form on Schedule A form 1040.
Homeowners can also benefit from the fees they pay to the lender for organizing a home loan. Each mortgage point provides a 0.25% reduction in interest rate. In the case of HELOC (Home Equity Line of Credit), a tax deduction is offered throughout the mortgage payment.
Private Mortgage Insurance
Homeowners pay PMI to lenders as a security fee. The IRS allows homeowners to mention PMI payments as home loan interest to receive deductions over that amount.
State and Local Tax (SALT)
Property taxes are a significant part of owning a house. States, counties, and cities offer several tax deductions to offset this expense. Eligibility conditions for SALT deduction depend on:
- Income statement
- If you are a professional or disabled professional
- Residential area
- Retired person
- Disabled person
Home Office Tax Breaks
Telecommuting or self-employed people having a specified area of the home entirely for their routine official business are offered tax deductions. Such homeowners receive tax breaks estimated per square feet area of their home office.
The IRS allows tax credits to homeowners having minimal annual income with MCC (Mortgage Credit Certificate). For every dollar you pay, your tax amount will reduce. You can receive both mortgage interest deduction and tax credit simultaneously, but the tax credit amount will then get subtracted at the time of itemization.
Home Sale Exclusion
Home sale exclusion refers to the reduction in tax on earned profit at home selling. Homeowners living for at least two of the five years before selling their home are allowed a tax exclusion on the first $250,000 ($500,000 for married persons filing together). This is called capital gains. Tax rates are different for each type of capital gain.
- Long-term capital gains involve 0% to 20% tax rates based on owners’ income and filing status with homeownership over a year.
- Short-term capital gains involve 10% to 37% tax rates based on owners’ income and filing status with homeownership under a year.
Homeowners need to assess their eligibility for each tax deduction mentioned above. Tax deductions significantly help in paying off your home mortgage debt. But it is financially beneficial to pay off your mortgage loan as soon as possible. To understand this better, suppose your tax bracket is 24%. Though your tax liability will decrease by 24%, you would have to pay 75% loan interest without tax deductions. Using a financial planner will help you make intelligent financial decisions according to your condition.