From personalizing your living space to creating a stable family living environment, there are several personal benefits of owning your own home. On the financial side, tax benefits are one of the biggest perks of homeownership. In honor of the upcoming tax day, we’ve compiled the list of the biggest tax breaks homeowners receive.
Interest & Points
When looking at an amortization schedule of your mortgage, the majority of your first years’ payments are towards interest, not principal. The benefit is that you can deduct that interest the year that it is paid, within certain limits. Homeowners can deduct up to $1 million in interest payments for a first or second home.
According to The Fiscal Times, 33.3 million returns cashed in on mortgage interest deductions in 2013 with an average deduction of $8,900.
Homeowners who pay points, or origination fees, on their home purchase or refinance can also deduct those points on their tax returns. A one percent fee on a $100,000 loan equals one point, or $1,000. Taxpayers can deduct the entirety of points in the year they were paid on a purchase. For refinance loans, points must be deducted as an amortization over the period of the loan.
Private Mortgage Insurance (PMI)
Several loan options have allowed homebuyers to purchase a home with little to no money down, but the downside of putting less than 20% down on your home purchase is the requirement to pay for private mortgage insurance.
Just because you pay mortgage insurance premiums doesn’t mean you get to deduct them. Here’s what qualifies you:
- Your home was purchased in 2007 or later.
- Your mortgage is for your primary residence.
- You do not exceed income limits. The PMI tax deduction begins to phase out once your adjusted gross income exceeds $100,000 ($50,000 for married filing separately) and disappears entirely at an adjusted gross income of $109,000 ($54,500 for married filing separately). Moderate-income homeowners making $100,000 or less can write off all mortgage insurance premiums.
Thanks to last-minute changes last year by Congress and the president with the Tax Increase Prevention Act, the private mortgage insurance deduction was retroactively extended for 2015 and 2016 tax years.
Property taxes are also deductible, though homeowners may only deduct the amount of property tax actually paid to their city or town for the year, which may not necessarily be the amount paid to escrow. The deductible amount can not include any other city/county fees that may have been on the same bill as property taxes.
If your taxes and insurance are paid through an escrow account, your lender will send a year-end statement, which you can file with your complete federal tax returns.
If you have owned and occupied your home for at least two of the past five years, you may earn up to $500,000 (for married taxpayers) or $250,000 (for single taxpayers) on the sale of your home and pay no federal income tax.
Energy Efficient Materials
Home improvements that go towards upgrading energy efficiency can also be deducted. This tax credit is applied as a direct reduction to how much tax homeowners owe, not just a reduction on taxable income. Ten percent of energy-efficient materials used for an upgrade can be used as a tax credit, up to $500. This tax credit was also extended for the 2015 and 2016 tax years.
As telecommuting has gained in popularity, many homeowners have converted rooms and spaces in their homes for an office area. Homeowners who work from their residence can typically deduct home office expenses if their home office qualifies. According to the IRS, requirements to claim the deduction include regular and exclusive use (meaning you use a part of your home regularly and exclusively for conducting business) and your home office is a principal place of your business.
Talk to your Certified Tax Professional about whether your home office meets the qualifications and your best option for deducting (standard or regular).
At Compass, we are not tax professionals. We always suggest you meet with a Certified Tax Professional before filing your taxes to make sure you are deducting these items properly in accordance with IRS regulations and to ensure you get the highest tax return possible on your home.
Tax deductions are one of the many benefits of being a homeowner. If you are looking to make your first home purchase, download our Mortgage 101 Handbook for access to tons of information on the homebuying and home financing process.