FINANCIAL WELLNESS

2 min read

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Jan 2022

3 Common Homeowner Tax Myths Debunked

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WHAT YOU'LL LEARN

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Why some deductions aren’t immediately available

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Not every closing payment is deductible

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The home office myth

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WHAT YOU'LL LEARN

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Why some deductions aren’t immediately available

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Not every closing payment is deductible

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The home office myth

For millions of Americans, homeownership is the ultimate dream. But the sad reality is prospective homebuyers are the group most susceptible to believing common homeowner tax myths.

Yes, whatever the loan type, owning your own place has its tax benefits. Conventional loans’ private mortgage insurance (PMI), the VA loan funding fee, the USDA loan guaranteed fee, and FHA loan upfront mortgage insurance premiums are each tax deductible according to the IRS. Here, you can find information directly from the source on extended tax benefits and useful information on what you can and can’t deduct.

However, not everything you might’ve heard about homeowner tax is true.

Whether you recently purchased a home, are in the process of doing so, or you’re about to fill out your mortgage application, there are a few things you should know about some common homeowner tax myths. We’ll debunk a few of those misconceptions to set you on the path to becoming a tax-savvy homeowner or potential buyer.

Deductions Always Cut Your Tax Bill in Half

Don’t get us wrong, it’s possible for your homeownership deductions to cut down your tax bill, but it’s far from a certainty. To claim the deductions, they must surpass the combination of the standard deductionA specific dollar amount that reduces the amount of income you must pay taxes on.standard deductionA specific dollar amount that reduces the amount of income you must pay taxes on. and non-home related write-offs, such as sales taxes or charitable donations. Additionally, you must itemize deductionsAn expense subtracted from your adjusted gross income (AGI) to reduce the amount of taxes you owe.itemize deductionsAn expense subtracted from your adjusted gross income (AGI) to reduce the amount of taxes you owe. on Schedule A (Form 1040).

So, if you close your loan in May, you’ll make several mortgage payments throughout the tax year. That means you’ll most likely exceed your standard deduction and write-offs. Thus, your tax bill will be reduced. If you close in December, you might not make a single mortgage payment in that taxable year. Therefore, you won’t exceed the standard deduction. You’ll need to wait a full year to take advantage of your homeownership tax benefits.

Every Payment Made at Closing is Deductible

Although some closing costs are deductible, not every fee you pay at the closing table can be written off.

Tax-deductible closing costs:

  • Real estate taxes

  • Mortgage interest

  • PMI

Concerning your personal residence, you won’t receive a tax break for your homeowners or flood insurance premiums. The same goes for appraisal fees, escrow accounts for property insurance and taxes, and title insurance.

A Home Office is Always Deductible

For those who qualify, a home office is, in fact, deductible, but the IRS’s definition of “home office” is very specific. If you’re self-employed, own a small business, work from home, and have turned one of your home’s rooms into your office space, you qualify. Everyone else who just works from their living room couch on their laptop, your “home office” isn’t exactly what the IRS is talking about.

A good rule of thumb: If you filled out a W-2, your office is not deductible.

Hopefully learning the truth about these popular homeowner tax myths has left you more informed and more prepared for homeownership. But more importantly, you won’t fall victim to these myths ever again!