Owning your own home is the American dream. There are many advantages to owning a home – your mortgage is often less than what you would pay in rent, it is an investment in which you will build equity, and you will have pride of ownership. But, there are more advantages than that! In fact, there are significant tax advantages to home ownership. When it comes to taxes it is important to know what breaks are available to you so you don’t leave any money on the table.
One of the most significant tax breaks you will get when you purchase a home is the ability to write off your mortgage interest payments. TurboTax elaborates on how this tax break will be to your advantage, “You can deduct interest on up to $1 million of debt used to acquire or improve your home. Your lender will send you Form 1098 in January listing the mortgage interest you paid during the previous year. That is the amount you deduct on Schedule A. Be sure the 1098 includes any interest you paid from the date you closed on the home to the end of that month. This amount is listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the 1098. If you are in the 25 percent tax bracket, deducting the interest basically means Uncle Sam is paying 25 percent of it for you.”
In addition to deducting your mortgage interest, you can also deduct your property taxes. Property taxes are often collected on a quarterly basis and whatever property taxes you pay for the year can be deducted on your taxes. And, it is not just on your primary residence! Both property taxes paid on your primary residence and even a vacation home are deductible on your income taxes!
Next, many homebuyers do not have a full 20% down payment when they buy their home which means that they have to pay private mortgage insurance (PMI). If you pay PMI, you can deduct the entire amount on your income taxes.
If you choose to make any upgrades to your home, you should check to see if they are eligible to be deducted on your taxes. If you add a solar energy system to your home you may be able to deduct it. Also, if you make upgrades to “age in place” you may be able to write off some of those upgrades. If you work from home and have a dedicated home office you can take a credit of $5 per square foot for up to 300 square feet of office space. There are strict guidelines for this tax deduction so it is important to fully understand the rules of what qualifies as a home office.
If you have to pay “points” when you get your mortgage for your new home, you can also also deduct the amount you pay for your points. And, if you take a Home Equity Line of Credit (HELOC), the interest your pay on the loan is tax deductible. There are many tax advantages to owning a home so do your research about which deductions and credits are available to you before you file your taxes.