Tax Benefits of Homeownership: Everything You Need to Know
Buying a home is a big money goal for a lot of people in America. Owning a home is part of the "American dream." It also comes with some tax benefits, which means you might get to pay less money in taxes.
Are you aware of the tax benefits of owning a home?
Here at Schafer & Associates, Florence's #1 tax firm, we work with a lot of people who own their homes. But we know that some of our clients, especially those who have just bought their first home, might not know about all the tax saving on a home loan they could get.
That's why we made this guide. It'll help you understand all the tax benefits you can get from owning a home.
Tax Benefits for Homeowners: An Overview
Homeowners have to pay for things like property taxes and the costs of fixing and looking after their homes.
There are many kinds of tax perks or ’tax benefits’ or ‘tax breaks’ for homeowners. For example, you could get a tax break for the interest you pay on your home loan or for costs related to having an office in your home.
In some situations, you might even be able to get a tax break for changes you've made to your home for medical reasons or housing loan tax benefit.
If you own a house, it's really important to know about these tax benefits and to use any that you can. You might want to get help from a tax expert to make sure you're not paying more taxes than you need to.
Tax Benefits of Owning a Home
Tax perks for owning a home can be more than you think.
Here's a simple breakdown of each perk, along with details about how it works and who can use it:
Home Loan Deduction in Income Tax
The interest that builds up each day on your home loan can end up costing you a lot of extra money.
Luckily, you might be able to get some of this money back when you do your taxes. It is also known as real estate tax deduction.
According to the IRS report in 2023, you can get a tax break on the interest for the first $750,000 of your home loan. If you're married and you and your spouse are doing your taxes separately, the amount is $375,000.
If you took out your home loan before 2017, you can get a tax break on the interest for the first $1,000,000 of your loan.
Prepaid Mortgage Points
Paying for "mortgage points" upfront is a way for home buyers to lower their interest rate and the total interest they have to pay. In many cases, the money you spend on these points can be taken off your taxes. Here's what you need to know:
The loan is for your main home.
You used the loan to buy or build your main home.
Paying for points is a common thing to do in your area.
The amount you paid for points is normal for your area.
You didn't borrow money from your lender to pay for the points.
The points were worked out as a percentage of the total amount of your home loan.
The amount you paid for points is clearly shown on your settlement statement.
Here, you need to remember that if your total home loan debt is more than $750,000 (or more than $1 million if the loan was taken out before 2017), you might not be able to take all the money you spent on points off your taxes.
Property Tax Deduction
Until now, we all know that a homeowner has to pay property taxes.
The good news is, the IRS lets you take some of this money off your taxes, up to $10,000 a year. But you need to have paid these taxes during the same year to be able to take this money off your taxes.
Remember, you can't take off certain costs, like fees you pay to your homeowners' association, transfer taxes, or payments for water, sewer, or trash pick-up.
Read the IRS report for more information.
Relaxation on Home Office
If you have a home office and you work from home all the time or just some of the time, you might be able to use the home office tax deduction to help with the costs of having a home office.
But be careful, the rules for this are pretty strict. And since the Tax Cuts and Jobs Act of 2017, this tax break doesn't apply to people who get a regular paycheck (W-2 employees).
In case you are self employed, you could choose a simple option that lets you take off $5 for each square foot of space that you use just for work.
If you use the normal method, you'll have to keep track of your costs and list your tax breaks one by one. You might also be able to take off costs for making a room in your home into an office.
Here, you need to remember that you'll only qualify if your home is the main place where you do your work.
Energy Efficiency Upgrades
Until January 2023, homeowners who put money into making their homes more energy-efficient can get a tax break.
With Energy Efficient Home Improvement Credit, you can take off 30% of the costs for certain things. These include:
Checks to see how energy-efficient your home is
Costs related to energy-efficient parts of your home
Any energy-efficient improvements you made during the year
Conclusion
Owning a home in America isn't just a part of the dream - it's a financial game-changer.
With a myriad of tax benefits available - from tax benefits to home improvement tax deduction , loan interest deductions, and energy efficiency credits, homeownership can work in your favor.
Remember, every dollar counts, so don't miss these tax perks. At Schafer & Associates, we're just a call away to help you navigate these benefits. Make your dream home work for you!