Important Tax Benefits Homeowners Should Know

Important Tax Benefits Homeowners Should Know

Thursday, Apr 14, 2022

Every taxpayer would like to minimize the amount of their income that is taxable. This effectively lowers their tax burden and potentially places them in a lower tax bracket — and because the federal government wants to incentivize homeownership, the IRS offers several significant itemized deductions (expenses that offset and decrease taxable income) connected to the cost of buying and maintaining a home.

However, it’s important to note that the Tax Cuts and Jobs Act of 2017 greatly increased the standard deduction (a deduction available to any taxpayer that does not itemize their deductible expenses).

For 2022, the Standard Deductions are:

  • $12,950 for single people and for married individuals filing their taxes separately
  • $25,900 for married couples filing their taxes jointly
  • $18,800 for heads of households (unmarried adults with qualifying dependents, such as minor children, who pay over half the cost to maintain their home)

Consequently, homeowners need to determine whether their itemized deductions would be larger than the standard deduction. Furthermore, not every home expense is deductible. The following common expenses associated with homeownership cannot be deducted:

  • Depreciation
  • Domestic employee wages
  • Fire insurance
  • Homeowner association fees
  • Homeowner’s insurance premiums
  • Mortgage down payments
  • Mortgage lender costs (e.g. credit reports, appraisal fees)
  • Mortgage principal payments
  • Origination points
  • Rent paid to live in a home before closing on it
  • Transfer taxes
  • Utilities (e.g. gas, electricity, water)

That said, there are several major deductions that are available to homeowners should they choose to itemize their deductions.

Itemized Deductions for Homeowners

Mortgage Interest

For most homeowners, mortgage interest will be the single largest deduction on their tax return. The IRS permits deductions for mortgage interest up to $750,000 for single filers or married couples filing together. Married couples filing individually can deduct up to $375,000 each.

Home Equity Loan Interest

Homeowners that tap into the equity they’ve accumulated in their home via a home equity loan or a home equity line of credit can deduct interest payments made on those loans. However, in previous years the tax code did not specify how any funds accessed were spent. The Tax Cuts and Jobs Act of 2017 added a requirement that the borrowed funds must have been spent on home improvements to qualify for deduction.

Property Taxes

Every state and most local municipalities have property taxes (taxes based on the value of a property). The IRS permits itemized deduction of state and local property taxes up to $10,000 for married couples filing jointly and $5,000 for unmarried taxpayers and married individuals filing separately.

Capital Gains

If a taxpayer sells a home for a profit (meaning the sale price exceeds what they paid for the property) they have to pay taxes on that capital gain. However, up to $250,000 of the capital gains associated with the sale of their home are deductible ($500,000 for a married couple) if they used it as their primary residence for at least two of the last five years. To qualify as a ‘primary residence’ the property must be where the taxpayer spends most of their time and the same address listed for their tax returns, driver’s license, and mail.

Discount Points

Mortgage points, also called discount points, are fees that a borrower pays their lender to lower their interest rate. Each point costs 1% of the loan amount. The amount each point lowers the interest rate varies by lender. Discount points are paid for at closing and are tax-deductible, however, origination points (fees paid to evaluate and process a mortgage) are not.

Private Mortgage Insurance (PMI)

Most lenders require that borrowers who have less than 20% equity in their home pay for PMI, which protects the lender in the case of a default. Those insurance premiums can be deducted from the homeowner’s taxes, however.

Necessary Home Improvements

A limited number of home improvements can be used as itemized deductions. Cosmetic upgrades would not qualify; neither would unnecessary improvements like an addition or putting in a swimming pool. Generally, the biggest home improvements that would qualify are connected to accessibility and health issues, such as installing handrails and stair lifts or adding ramps and widening doorways for a wheelchair.

Home Office Expenses

Taxpayers operating a business in their home can deduct some of the expenses of their home office, but only if that room is used exclusively for their work. The IRS also offers a standardized home office deduction of $5 per square foot (capped at $1,500).

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