7 Important Tax Deductions for Homeowners

Getting a Mortgage

7 Important Tax Deductions for Homeowners

November 24, 2021

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The major cost to buying a house is no secret. It’s one of the biggest purchases a person can make in their lifetime. The costs begin the moment you decide you want to buy a house and continue until the day you stop owning a home.

Luckily, there are a few deduction opportunities that can lower the amount you pay on taxes each year. Tax deductibles or tax breaks can lower your tax burden by reducing your overall household taxable income. Taking advantage of these tax breaks can amount to you saving thousands of dollars every year and that’s exactly what you’ll learn about in this blog post.

Before we talk about important tax deductions that you can take advantage of as a homeowner, you should know about the two types of tax deductions as you can only choose one or the other when filing taxes.

Itemized Deductions vs Standard Deductions

The standard deduction is a fixed amount that is deducted from the income you’re being taxed upon, depending on your filing status. For example, if you are filing as a single or married filing separately, you are eligible for $12,400 in standard deductions. The deductions increase to $24,800 for a married couple filing jointly. The amount further increases for individuals who are above the age of 65 (it goes up by $1650 for single individuals and by $1300 for married individuals or qualifying widow/widower).

Itemized deductions work differently from standard deductions because these deductions differ from taxpayer to taxpayer. Itemized deductions are the expenses that will get deducted from your adjusted gross income (AGI), permitting you to pay less in income taxes (if you qualify) than you would if you take a standard deduction.

Adjusted gross income is your total income without any deductions applied to it. Your gross income is used to calculate your taxable income. If you subtract the allowances and itemized deductions from your AGI, you get your taxable income.

Commonly allowed itemized deductions include:

  • Property taxes
  • Medical and dental expenses
  • Charitable contributions
  • Real estate expenses such as mortgage interest
  • State taxes

Whether you are choosing itemized deductions or standard deductions, you’ll want to make sure that the option you choose benefits you the most to keep your tax liabilities at a minimum.

7 Itemized Tax Deductions for Home Owners

1. Mortgage Interest Deduction

Did you know that you can deduct the mortgage interest you’ve been paying on the first $1 million of mortgage debt?

Although the limit has been reduced since the Tax Cuts and Jobs Act came into practice, you can still deduct the mortgage interest paid on the first $750,000 of a mortgage when filing as a single or a married couple filing jointly.

For couples who are married filing separately, each party can deduct mortgage interest paid on $375,000 of mortgage debt.

2. Mortgage Points or Discount Points

When securing a mortgage, you can reduce the interest rate by buying mortgage points. The process, also referred to as ‘buying down the rate’, is a common practice used by savvy home buyers to bring down their mortgage interest rate.

Mortgage points are are the fees that you pay a lender as a closing cost for a reduced mortgage interest rate. Each point is worth 1% of the total mortgage loan amount. On a $400,000, 1 point would amount to $4,000. Also, each point lowers the mortgage interest rate by 0.25%.

If you bought mortgage points for your primary residence, then they become tax deductible. For a second home, you cannot deduct mortgage points in the first year, but you can deduct them over the life of your loan gradually.

3. Property Taxes

When you purchase a home or any real estate property, you have to pay property taxes at the state and local level. These property taxes are eligible for tax deductions and can be highly valuable depending upon your location.

Married couples filing jointly are eligible for tax deductions at up to $10,000 in property taxes. Whereas for single individuals or couples filing separately, the limit is $5,000.

4. Private Mortgage Insurance (PMI) Premium

Private Mortgage Insurance, usually charged in cases where you put less than 20% in down payment, is the type of insurance ussed to protect mortgage lenders in case the borrowers fails to make mortgage payments on time.

If you are paying private mortgage insurance (PMI) on your home loan, then you can deduct their premium on your tax returns. The Private Mortgage Insurance deductions disappear if your annual AGI is more than $109,000. However, if it falls between $100,000 to 109,000, gets reduced by 10% for each $1000 increase in the income.

The PMI deduction is set to expire after 2021.

5. Home Office Expenses

For self-employed and working-at-home individuals, the expenses for the business utilization of their house can be tax deductible. The amount of home office deductions depends upon the percentage of your house dedicated for business purposes.

The key factor for eligibility of home office deductions is that you a certain part of your house is being used extensively and regularly for a money-making endeavor. Here are a few of the things that you can deduct under home office expenses:

  • Your utility bills
  • Insurance costs
  • Depreciation of furniture
  • General repairs
  • Cleaning expenses

Employees who are working remotely are not eligible to claim home-office expenses as a tax deduction.

6. Capital Gains

Capital gain is the profit you make when you sell a house for a higher amount than what you bought it for.

For example, if you bought a house of primary residence for $200,000 a couple of years ago and now you are selling it for $275,000, you are walking away with a capital gain of $75,000. You can keep this amount made in profit without any tax obligations.

The IRS considers your home a capital asset. When you sell a capital asset for a profit the IRS requires you to pay a capital gains tax. However, if you are a homeowner selling your primary residence (i.e. a residence where you have been living for at least the last 2 out of 5 years), you don’t have any tax obligations on the capital gains up to a specified limit ($500,000 for married couples filing jointly and $250,000 for single filers).

Unfortunately, you don’t get any tax breaks if you sell a house for a loss.

7. Other Common Deductions

Other than the ones listed above, some other common tax deductions for homeowners include:

  • Medical expense deduction for any changes made to your home for medical reasons, or for installing special equipment in your house
  • Tax credit for installing energy-efficient equipment in your house
  • Expenses on your rental property such as insurance, general repairs, real estate taxes, utilities, and more

You can find a complete list of tax deductions for homeowners here.

Tax Season Is Almost Here

We’re getting to the end of the year and that means tax season will be here before you know it. Using these tips can help you save thousands of dollars in tax benefits. If they seem too complicated, you can always speak to a tax specialist that can explain these deductions more clearly and even recommend even more ways to save you may not know about.

All the best!