The Tax Benefits of Homeownership

As a result, you may eventually see a lower tax burden. Here, we examine how tax breaks function for property owners.

How It Works

A significant benefit that you enjoy as a homeowner is the ability to deduct your property taxes and mortgage interests whenever you file your tax returns.

As a mortgaged landlord, you are eligible for several tax breaks, including exemptions and credits. Effective utilization of these tax reliefs may lower your tax liability, make your house a more cost-effective long-term asset.

However, the Federal IRS limits how much tax deduction you receive. Effective 2017, you can cut down on your mortgage interests up to a debt limit not exceeding $1,000,000.

Five Tax Deductions for Property Owners

As already mentioned, you can access a myriad of tax deductions to cut down on your tax burden. If you’re thinking about buying a house, shop around for the best interest rate because lenders’ rates vary.

Here are five substantial tax breaks you may be eligible for as a result of your ownership:

1.  Deduction for Mortgage Insurance

If you put down less than 20% of the property’s appraised value, you’ll almost certainly have to pay PMI. The good news is that if you got a loan in 2007 or later, you might qualify for a deduction on your PMI payments.

However, when your gross income reaches a critical threshold, the discount shrinks until you’re no longer eligible for it due to your earnings.

2.  Deduction for Mortgage Interest

One of the principal tax benefits of homeownership is the ability to recoup all of your loan interest up to a specific debt load.

If you bought your home before December 15, 2017, you could debit interest on up to $750,000 if you file jointly and up to $375,000 if you file individually.

3.  Deduction for Property Taxes

Whenever you pay property taxes, you can debit the entire amount paid each year, up to $5,000 if you file solely and $10,000 for a joint filing. This limit applies to both local and state tax levies. However, like the other deductions, you can only deduct property taxes if you (itemize) pay income tax.

4.  Deduction for Mortgage Points

You can cut down your taxable income if you exchange money for points, regardless of whether you have a new loan or a re-mortgage.

Mortgage points accrue to the lender at closing to lower your lending rate. They represent a percentage of the total loan.

5.  Deduction for Home Office

You can debit a fraction of your tax bills if you’re using a chunk of your residence solely for business.

For instance, if your office occupies 5% of your residence, you can debit 5% of your mortgage repayments.

How To Calculate Your Tax Savings

The 2017 Tax Reforms Act overhauled the US Tax code, creating a uniform rate of 21% for all corporations. Furthermore, the act limited the tax benefits for homeowners who wish to buy expensive property.

For instance, if you own property, you cannot claim a deduction on mortgage interest exceeding $750,000 of your mortgage debt.

Calculating your tax savings on homeownership may be difficult because of changes brought by the new tax bill.

Here is a simple way out:

To calculate your tax savings, multiply your monthly mortgage payment and property taxes by the income tax rate set by the federal government. The formula works well because a smaller portion of your non-deductible loan repayment effectively offsets any overlooked tax savings.

Closing Costs

You just acquired a new property and are ready to move in. On the material day when the property becomes yours (closing day), the seller will demand payment for all the closing costs.

However, a one-off payment of closing costs can render you financially drained. Therefore, it would help if you prepared beforehand to settle the closing costs before you occupy the property.

Bottom line

Many provisions in the tax system benefit property owners. The main advantage is that if you itemize your deductions, you can debit your loan interest and asset tax payments from your federal taxes.

Seek advice from a tax advisor for more information on itemizing your deductions and qualifying for tax relief.