Tax Benefits of Home Ownership

A home buyer’s decision to purchase vs rent is often predicated upon their ability to afford the down payment. However, for individuals or families looking to take the plunge into real estate ownership, it’s worth considering how the keys to the new castle can help you when tax season rolls around.

Before we dive in, it’s important to note that you’ll need to itemize your taxes (on Schedule A) in order to benefit from these real estate related tax deductions. In other words, if you plan to take the standard deduction ($12,950 for single filers, $19,400 for heads of households and $25,900 for married filing jointly) – the following points likely won’t benefit you (just don’t want to waste your time!)

With that said, here are a few places you can look to save money come tax season:

Property Taxes

State and local property taxes can be deducted on primary residences, vacation homes, land and personal property (such as Cars, Boats, RVs etc).

Per IRS Topic 503: “As an individual, your deduction of state and local income, sales, and property taxes is limited to a combined total deduction of $10,000 ($5,000 if married filing separately). You may be subject to a limit on some of your other itemized deductions also.”

Mortgage Interest

According to the IRS (Publication 936) “You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017”.

Capital Gains

If you’re selling your home you can exclude $250,000 (for single filers) and $500,000 (for married filing jointly) worth of profit from your home sale. So if your profit exceeds either of the aforementioned amounts, you’ll have to pay taxes on the excess. If you’ve made improvements to your house (interior renovations, new windows, roofs etc) these can all help to reduce the amount of your gain.

Deduct Expenses Against Rental Income

When renting a property, you can claim property taxes, Insurance, mortgage interest, operating costs and property repairs as deductions against the income your rental generates.

Let’s not forget that real estate taxes are deductible in the year that they’re PAID… not the year in which they were assessed. In other words, if your taxes were assessed in late 2020, but you didn’t pay them until 2021, the tax deduction would take place on your 2021 return.

This list is meant to help you weigh some options, but certainly isn’t a comprehensive guide to reducing your tax load. We definitely encourage you to do your own research and consult a CPA for your tax planning needs.