Tax Benefits That Come With Homeownership

Have you just bought a home? We congratulate you on taking that big step and elevating your social status. But guess what? You've not just ensured a roof over your head and a place with 100% privacy.

There's another advantage you've signed up for - Homeowner Tax Deduction. Yes, you'll be curious to contact your lawyers and understand more about the possible homeowner tax deductions and how you can save your money.

But why make that effort, when all the information you need is in this blog? You just need to stick around.

We'll help you understand how you can save yourself from giving high amounts of tax and reduce your tax liabilities.

Before we get started and tell you about the tax breaks for homeowners, here's something you'd want to know. You can only take advantage of the tax breaks if you separately itemize each claim on your tax return.

Confused? Well, that's natural if you're not a finance person. When we say Itemizing, it means having a detailed breakdown of incomes eligible for deduction like mortgage interest, property taxes, medical expenses, and others.

It's also worth keeping in mind that IRS offers standard deductions as well. So, the breakdown would help you compare the deduction which is itemized, and the standard deduction by IRS.

If your itemized deductions exceed the standard deduction, it will reduce your taxable income and help you save a lot of dollars. But the flip side is, if the standard deduction exceeds your itemized deductions, itemize the tax return, and spending all that time doing it won't be rewarding.

Now that we know what itemizing is, let's look at the expenses which can be itemized for homeowner tax deductions.

Mortgage Interest Deduction

When you pay the mortgage for your home, there's a certain interest that needs to be paid on top of the original home value. But did you know there are certain tax breaks for homeowners that can reduce your mortgage interest?

At this point, you must be thinking, "That's great, anyone can take advantage of the homeowner tax deductions." Well, that's unfortunately not the case. These tax breaks are for homeowners who are single, married, or head of the household.

As of 2023, the mortgage interest tax is deductible for interest up to $750,000. This limit is applicable if you file as single, married but filing together, or the head of the household. If you file as a couple, the limits reduce to $375,000 each.

Excited that you can claim the deducted amount and possibly reinvest in buying other property? Sorry, but that's not how the tax break for homeowners work. You can't reinvest the deducted amount for other properties.

So, you'll have the question, "What can you do?" For starters, you can use the deducted tax for home maintenance and renovations. Any expense which isn't directly reinvested in buying a property or paying off a mortgage of a secondary property is acceptable.

Property Taxes Deduction

As a homeowner, you'd know you need to pay real estate taxes on your primary residence. These include multiple sales tax, state tax, and local income tax. But did you know there are also homeowner tax deductions you can avail?

If you're single or decide to file jointly after marriage, you can deduct up to $10,000. If you're married but decide to file separately, the deduction amount may come down to $5000.

Now, here's a question for you. Are you someone who pays property taxes in installments? If so, you can only deduct the property taxes when the money in the account which is the entire tax to be paid.

Another thing you'd want to keep in mind is that you can't have it all your way. You can have one of either your property and local income tax deducted, or property and state sales tax deducted.

The property homeowner tax deduction can be extremely beneficial for individuals who have valuable properties. If you're having trouble itemizing or accurately calculating your property tax, find a renowned real estate to help you out.

Home Sale Profits Tax Deduction

When you sell something, IRS is usually there to get a cut of your profits. Things aren't much different when you sell your home. The moment you complete the formalities and hand over the keys to the one you're selling to, a percentage of your profits goes to the IRS.

Wouldn't you like to know about a tax break for homeowners here? Of course, you are the reason why you're still with us.

If you've lived in a certain property for the last 2 out of the five years, you become eligible for the homeowner tax deduction.

In value terms, if you're a single homeowner, you don't have to pay any tax for the first $250,000 profit you make. But what if you're married? Well, in that case, you can have a profit of up to $500,000 without having to pay taxes.

But how are your profits calculated? You'd assume it simply goes like [The price you bought the house at - The price you're selling it at]. If only it were that simple. You'll also need to factor in any major improvements you've made after buying the house.

Pro Tip

Save receipts/keep track of any major expenses that went into your home improvement

Home Improvement Tax Deduction

As we've already discussed in a previous blog, Pros and Cons of Owning a Home, owning a home means taking care of all maintenance yourself. Don't expect or wait for your landlord to fix it for you.

That means seeing your expenses rise up. Sounds unfavorable doesn't it? Well, to cheer you up, we have come with good news. All expenses on home improvement or renovations to make your house more livable are non-taxable.

These include things like installing ramps, renovating the kitchen, repainting or changing the wallpapers, putting on artificial grass, or similar other home changes.

And guess what? There's another interesting way for homeowner tax deductions. If you invest in efficient energy upgrades, you can avail the tax credit, which is non-refundable. Want to make use of these tax breaks for homeowners? You can start by installing alternate energy source(s) for your home like:

• Solar Electric
• Wind turbines
• Solar water heaters

We're way ahead of you and know what your next question would be, "How is the tax credit calculated?" The tax credit varies from when you invested in the alternate energy upgrade.

As of 2023, if you paid for an upgrade in 2020, your tax credit is 26% of the item cost. Similarly, if you paid in 2021, the tax credit is 22% of the item cost you installed.

Home Office Tax Deduction

Startups and remote work cultures have exponentially grown since the 2019 pandemic shocked the world. There are business owners operating from their homes to save extensive and avoidable overheads. If you're also a homeowner doing it, or thinking of doing it, you can be eligible for another homeowner tax deduction.

Thinking about what expenses you can deduct from your taxable income? Here are some of the most common ones.

• Home mortgage interest
• Repairs
• Security
• Utility items
• Insurance

Want to clear your doubts about which part of your house will be considered as the Home Office? We were expecting you'll ask that question and here's the answer.

You can claim a deduction for activities taking part in your home office area. These activities include things like inventory storing, meeting business people, and solely using the space for business operations.

For example, supposing you have a house on 3000 square foot land, and your home office on 600 square feet, you can reduce 20% of your home cost.

Before you pick up your phone and call your boss to say, "I'll be working from home," for claiming the homeowner tax deduction, there's something you'd want to know.

This home office can only be claimed if you're legally a small business owner, or are self-employed.

Wrapping it Up

Every penny saved today and a penny spent tomorrow.

These were some of the homeowner tax deductions that the citizens are legally eligible for, but don't often know about. Leveraging tax advantages and lower tax liabilities can save you a lot of finances, which can be better spent elsewhere.

Yes, you know the homeowner tax deductions you can take advantage of. But is this information enough? The answer is No.

Just like almost everything around us, real estate policies generally change over time. These policies, valid in 2023, may have changed by the time you're reading this. Some new homeowner tax deductions may come up, which you might want to know about.

That calls for getting in touch with a reliable real estate agency like HAR. We have updated insights that can help you save a lot of your money spent on taxes. Connect with our real estate professionals today and make decent financial decisions.