What are the Tax Benefits of Buying a Home/House

There are many more advantages of owning a house rather than renting one. You can knock down the walls if you want to, you can paint the walls with purple polka dots if you like or you can install home theater system but there are some other financial benefits as well.

If you are living in rented house then all the money will goes to the landlord and not a single penny will returned to you as a tax deduction.

Whether you buy a condominium, mobile home, townhouse, single-family home or cooperative apartment several tax breaks can save you money at tax time.

Your taxes can get more complicated, you cannot just plug your W-2 information into Form 1040 and taxes can be finish in 10 minutes. As a owner of the house, you can take advantages itemizing, can save lots of money.

Tax Credits vs. Tax Deductions

In the world of tax, deduction and credit both are there but Credits are better.

• A credit is directly minus from your tax bill. If you get a credit of $1000 then the total tax amount will be decrease by $1000.

• A tax deduction reduce Adjusted Gross Income (AGI) of a person, which eventually reduces the amount of taxes you owe. For Example – If you are fall under 24% tax bracket then your tax liability get reduces by 24% of the total claimed deduction. And if you claim $1000 deduction then tax liability will drop by $240 ($1000 x 24%).

Tax Deductions for Homeowners

Here are most common deductions which comes from owning a house (form of deductions)

Mortgage Interest Deduction

Home mortgage interest can be deducted on the first $750,000 ($350,000 if married filing separately) of mortgage debt. The old limit was like $1 million and $500,000 if married filing separately, this old limits was applied if you bought a house before Dec-16-2017.

After end of the tax year (In January) your respective lender will send you Form 1098 Internal Revenue Service (IRS), detailing the total interest you paid in the previous year.

If you bought you house then make sure to include any interest that you have paid as a part of your closing. Lender will include the interest for the first partial month of your mortgage as a part of your closing. you can find those details on settlement sheet. You can ask your mortgage broker or lender to point this out to you. If this is not included on your 1098, when you are doing your taxes add this to your total mortgage interest.

Private Mortgage Insurance (PMI)

Borrowers who put down less than 20% on a conventional loan, lender may charge Private Mortgage Insurance (PMI) to such borrowers. $30 to $70 a month usually cost by PMI for each $100,000 borrowed. For mortgage insurance, if you stop making mortgage payments, PMI protects the lender (not you).

Based on your income and you bought a house, you might be able to deduct PMI payments.

Mortgage Points Deduction

As a part of new loan or refinancing, you may have paid mortgage points to your lender. Each point tht you buy generally lower your interest rate by 0.25% and costs you 1% of the total loan. For Example, If you paid $200,000 for your house/home, each point would equal to $2,000 ($200,000 x 1%).

With a rate of interest 4%, for the life od the loan that one point would lower the rate to 3.75%. You will get a deduction as long as you gave the money to lender for these discount points.

If you took out a home equity line of credit (HELOC) or refinanced your loan, you will receive a deduction for points over the life of the loan.Some percentage of points built into the loan whenever you make a martgage payment. Each month you can deduct that amount that you made payments. Your deductible amount would be $60 if you $5 of the payment aws for points & you have made year worth of payments.

Form 1098 detailing how much you paid in mortgage points and mortgage interest, lender will send that form. you can claim the deduction on Schedule A of Form 1040 or 1040-SR.

State and Local Tax (SALT) Deduction

If you have itemize your federal return then state and local tax (SALT) deduction allow you to deduct certain taxes paid to the state and local governments.

If you are single then $10,000 cap applies, same applicable if you are married and filing jointly. The price drops to $5,000 if you are married and filing seperately. The deduction limit relates to the combined total deduction of local income, state income, property taxes and sales.

You will be able to find the amount which is paid to lender on form 1098,if you have paid it through escrow account. Otherwise, you can check your personal records in the form of automatic transfer or check if you pay directly to your municipality.

Make sure that you include all your payments that you made to seller for prepaid real estate taxes (On settlement sheet you can find them). Local and state income taxes withheld from your paycheck appear on your W-2 form, which employers should send it to you by the end of January following the tax year. If you select to deduct local and state sales taxes instead of income taxes (you cannot deduct both), you can use the optional sales tax or actual expenses tables found in Schedule A (Form 1040).

Home Sale Exclusion

You should thanks to the Home Sale Exclusion, Why? because there are chances that you won’t have to pay taxes on most of the profits that you make whenever you sell your house/home.

If you owned & lived in the house for at leat 2 years out of 5 years before the sale, you will not pay taxes on first $250,000 of profit you make (This is Capital gain). If you are married and filing jointly then the number doubles to $500,000. However, both spouse should meet residencial requirement and at least one spouse must meet the ownership requirement.

If you had to sell your home early due to a job change, divorce or some other reason, then you might be able to meet part of the residency requirement.

Depending on how long you own the home, any gains will be taxed at the short-term or long-term capital gains rate:

• Short-term capital gains tax rates is applicable if you owned the house/home for less than a year. These gains are taxable at your ordinary income tax rate, which is between 10% and 37% depending on your yearly income.

• Long-term capital gains tax rates is applicable if you owned tha house/home more than a year. The rate is 0%, 15%, or 20% depending on your filing status and yearly income.

Tax Credits

If you have issued a qualified mortgage credit certificate by a localor state governmental unit or any third party agency under a qualified mortgage credit certificate program they you might be eligible for the mortgage credit.

Also, check energy.gov to find out whether your state offers rebates, tax credits and other incentives for energy-efficient improvements to your home.

Which Expenses Can I Itemize?

Homeowners can generally deduct home mortgage interest, mortgage points, home equity loan or home equity line of credit (HELOC) interest, state and local tax (SALT) deductions and private mortgage insurance (PMI).

Whether or not you’re a homeowner, you may be able to deduct casualty and theft losses, charitable donations, unreimbursed medical and dental expenses, some gambling losses and long-term care premiums.

On Schedule A Form 1040, you can itemize your deductions.

Who Should Itemize Deductions?

All taxpayers have the two different options whether to take the standard deduction or itemizing deductions. You can select any one of them whichever option saves you the most.

The standard deduction for the 2024 tax year is $1,460 for singles and $29,200 for couples filing jointly. For the 2023 tax year, it’s $13,850 for singles and $27,700 for couples.

What Are the Standard Deduction Amounts for 2023 & 2024?

For the 2023 tax year, the standard deduction is $13,850 for married couples filing separately or single people, $27,700 for married filing jointly couples and $20,800 for heads of household.

For the 2024 tax year, the standard deduction is $14,600 for married couples filing separately or single people, $29,200 for married filing jointly couples and $21,900 for heads of household.