4 Tax Deductions That Are Big Perks of Homeownership
Becoming a homeowner is something to be proud of. All of your hard work saving money, searching for a home, and going through the mortgage process finally pays off as you turn your new house into a home. Having a place to call your own is a huge reward, but did you know there are even more perks for homeowners — in the form of tax breaks?
Top four tax breaks for homeowners
Some of your largest home-related expenses are often tax-deductible – which is great news! In some cases, you may find it necessary to itemize your tax deductions instead of taking the standard deduction — which means you might forego tax forms ending in “EZ” for ones that may be slightly more complex. I think we can all agree that lowering your tax bill is worth the added effort. Here are the tax breaks you may be able to take advantage of as a homeowner.
1. Mortgage interest
This is usually the most significant tax break you’ll receive, since a big chunk of your monthly mortgage payment goes towards paying off interest for a while after your purchase. All of the interest you pay during the tax year will be deductible. If you happen to own properties with mortgages balances over a million dollars, the IRS will limit your deductible interest. Own a second home? Your interest for that mortgage is also deductible. If you rent out your property part of the year and live in it the other part, you may be eligible to deduct that interest. Just beware, if you live or vacation there less than 14 days out of the year or less than 10% of the number of days you rent it out, the IRS may consider it a residential rental property, eliminating your ability to take an interest deduction.
2. Points
When you buy a home, you have the ability to pay “points” to your mortgage lender in order to lower your interest rate. Typically, a point is 1% of the loan price — so if you bought or built a new home that costs $250,000 and you paid your lender for one origination point, you should be able to deduct the $2,500 in closing costs paid, from your taxes the year of the home purchase. Let’s say your lender asks for 1.5%; this would mean you can deduct $3,750 from your taxes the year of the home purchase. Generally, you can also deduct points on the year’s taxes if you took a home equity line of credit in order to make home improvements. If you refinanced or took out a home equity loan for something other than home improvements, you might have the ability to deduct points as well. However, it usually must be spread over the life of the loan instead of in a single year’s tax return. While it may not provide as big of a tax break, the savings will still add up over time.
3. Real estate taxes
You’ll also have another big deduction to take on your tax return — property taxes. No matter where your home is located, you’ll pay some form of real estate tax. If you have an escrow account, (most mortgages do), it means you’ve been paying a portion of your total property tax bill for the year as part of your monthly mortgage payment. But don’t fret, you don’t have to keep up with the dollars and cents in order to take this deduction. Your lender will send you an annual statement, which will break down what you’ve paid in taxes and interest and what portion went to your escrow account to be used towards taxes. You can only deduct the amount your lender paid from your escrow towards taxes.
4. Energy efficiency credits
In addition to saving you money on energy costs, making improvements to the efficiency of your home may qualify you for a tax credit.
Tax credits are actually somewhat superior to deductions, since they are dollar-for-dollar savings no matter what tax bracket you fall into.
Upgrading your home’s windows, roofing, appliances and more with energy efficient equipment will generally count toward a tax credit of this nature, but it’s important to check with the IRS to be sure, as things can change from year to year.
What's not tax-deductible?
Taxes can be downright confusing; trust me, it’s not just your head spinning while trying to understand tax liability. You may be wondering if there are any home expenses that are off-limits when it comes to lowering your tax bill — and the answer is yes. Here are just a few things you unfortunately cannot deduct from your tax return:
Insurance premiums, such as comprehensive, fire, or title insurance
Principal paid on your mortgage
Home utilities, such as water, gas, or electricity
HOA dues
Even though not every home expense qualifies you for a deduction, taking advantage of the big-ticket items like interest and property tax deductions can help you save a pretty penny come tax time. If you weren’t a fan of taxes before, becoming a homeowner should certainly help you warm up to them a bit with the savings you might be eligible for.