Owning a home is a dream for many Americans, and it comes with many benefits. One of the biggest benefits is the tax advantages that homeowners can enjoy. Here are some of the key tax benefits of owning a home in the US.
Mortgage Interest Deduction
One of the biggest tax benefits of owning a home is the mortgage interest deduction. This allows homeowners to deduct the interest they paid on their mortgage loan from their taxable income. The mortgage interest deduction is available to those who itemize their deductions on Schedule A of their tax return.
Let’s say you take out a 30-year mortgage for $300,000 at an interest rate of 6%. Using the reducing balance method, the amount of interest paid each year will vary as the outstanding balance on the loan decreases over time.
In the first year, you would pay $17,899.78 in interest. Assuming you are in the 24% tax bracket, you can deduct that $17,899.78 from their taxable income if you itemize your deductions on Schedule A of your tax return. This would result in a tax savings of $4,295.95 ($17,899.78 x 24%).
In the second year, the outstanding balance on the loan would have decreased, and the amount of interest paid would be lower. Let’s say you pay $17,672.56 in interest during the second year. You can deduct this amount from your taxable income, resulting in a tax savings of $4,241.41 ($17,672.56 x 24%).
Year Beginning Balance Interest Paid Tax Savings
(for 24% tax bracket)
1 $300,000 $17,899.78 $4,295.95 2 $296,315.96 $17,672.56 $4,241.41
This process would continue over the course of the 30-year mortgage tenure, with the amount of interest paid decreasing each year as the outstanding balance on the loan decreases.
It’s important to note that there are limits to the mortgage interest deduction. The deduction is limited to interest paid on a mortgage of up to $750,000 ($375,000 for married couples filing separately) if the mortgage was taken out after December 15, 2017. If the mortgage was taken out before that date, the limit is $1 million ($500,000 for married couples filing separately). Additionally, under the Tax Cuts and Jobs Act of 2017, the interest deduction on home equity loans or lines of credit is no longer allowed unless the funds were used to buy, build, or substantially improve the home.
Property Tax Deduction
Homeowners can also deduct the property taxes they pay on their primary residence and second home from their taxable income. The property tax deduction is also available to those who itemize their deductions on Schedule A.
Let’s say you own a home in Texas that has an assessed value of $300,000, and the property tax rate in your county is 1.6%. This means you would owe $4,800 in property taxes each year. Assuming you are in the 24% federal income tax bracket, you could deduct the $4,800 of property taxes paid from your taxable income, reducing your tax bill by $1,152.
Capital Gains Exclusion
Homeowners who sell their primary residence can exclude up to $250,000 in capital gains from their taxable income if they file their taxes as an individual, or up to $500,000 if they file jointly with their spouse. To qualify for the exclusion, the homeowner must have owned the home and lived in it as their primary residence for at least two of the previous five years. The two years do not need to be consecutive, but they must have occurred within the five-year period.
You can only claim the capital gains exclusion once every two years. If you’ve excluded capital gains from the sale of another home within the past two years, you may not be able to claim the exclusion again.
It’s important to note that these requirements apply to the sale of a primary residence, and not to the sale of a second home or rental property.
Mortgage Insurance Premium Deduction
Homeowners who are required to pay mortgage insurance premiums may be able to deduct those premiums from their taxable income. This deduction is available to those who itemize their deductions on Schedule A.
The deduction is subject to income limits. For tax year 2022, the deduction is phased out for taxpayers with an adjusted gross income (AGI) of more than $100,000 ($50,000 for married filing separately). The deduction is completely eliminated for taxpayers with an AGI of more than $110,000 ($55,000 for married filing separately).
Energy Efficiency Tax Credits
Homeowners who make energy-efficient improvements to their home, such as installing solar panels, may be eligible for tax credits. These credits can help offset the cost of the improvements.
Disclaimer: Factors like your income, deductions, and tax credits can impact your tax liability. Additionally, not all homeowners will benefit from itemizing their deductions. You should consult with a tax professional to understand how the mortgage interest deduction may impact your individual tax situation.