7 Tax Benefits of Owning a Home

The new Tax Cuts and Jobs Act—the most substantial overhaul to the U.S. tax code in more than 30 years—went into effect on Jan. 1, 2018. So, as you prepare to file your taxes, you might want to consider how the new plan will affect the perks of homeownership.

Here, realtor.com breaks down exactly what changed, and all of the tax breaks homeowners should be aware of when filing their 2018 taxes.

1. Mortgage interest

In the past, one of the most lucrative tax breaks for homeowners was the deduction for mortgage interest. The new tax code didn’t eliminate the deduction, but it did change substantially.

The new tax bill allows homeowners with a mortgage that went into effect before Dec. 15, 2017, to continue to deduct interest on loans up to $1 million.

For acquisition debt incurred after Dec. 15, 2017, however, the tax reform only allows the homeowner to deduct the interest on the first $750,000. But the ability to deduct the interest on a mortgage continues to be a big benefit of owning a home, and the more recent your mortgage, the greater your tax savings.

Note: The mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled to $24,400 for a married couple (it used to be $12,700). For individuals the deduction is $12,200, and it’s $18,350 for heads of household.

As a result, only about 5 percent of taxpayers will itemize deductions this filing season, compared with about 30 percent in the past. For some homeowners, itemizing simply may not be worth it this year.

So, when would itemizing work in your favor? As one example, if you’re a married couple who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $2,000 by itemizing.

2. Property taxes

In the past, property taxes in their entirety were always deductible. Now this deduction is capped at $10,000 for those married filing jointly, no matter how high the taxes are. But taxpayers can still take one $10,000 deduction.

Note, however, that this year property taxes are on that itemized list of all of your deductions that must add up to more than the standard deduction ($24,000 for a married couple) to be worth your while. And remember that if you have a mortgage, your taxes are built into your monthly payment.

3. Private mortgage insurance

If you put less than 20 percent down on your home, you’re likely paying private mortgage insurance, or PMI, which costs from 0.3 percent to 1.15 percent of your home loan. The good news is that the new tax bill extended the ability to deduct the interest on this insurance.

The PMI interest deduction also is an itemized deduction. But if you can take it, it might help push you over the $24,000 standard deduction. And here’s how much you’ll save: If you make $100,000 and put down 5 percent on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and cut your taxable income by $1,500.

4. Energy-efficient upgrades

The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, the credits for solar electric and solar water heating equipment are available through Dec. 31, 2021.

You still can save on your solar energy. And this is a credit, so you don’t have to worry about itemizing. However, the percentage of the credit varies based on the date of installation. For equipment installed between January 1, 2017, and December 31, 2019, 30 percent of the expenditures are eligible for the credit. That reduces to 26 percent for installation between Jan. 1 and Dec. 31, 2020, and then to 22 percent for installation between Jan. 1 and Dec. 31, 2021.

5. A home office

If you worked from home at all in 2017, your office space and expenses could be deducted. Now this deduction is gone completely for employees who have an office to go to but work from home occasionally.

However, there’s good news for all self-employed individuals whose home office is the main place they work. You still can take a $5-per-square-foot deduction for up to 300 square feet of office space, which amounts to a maximum deduction of $1,500. But understand that there are strict rules on what constitutes a dedicated, fully deductible home office space.

6. Home improvements to age in place

For this filing season, these home improvements will need to exceed 7.5 percent of your adjusted gross income. So, if you make $60,000, this deduction kicks only if you’ve spent more than $4,500.

The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations, such as wheelchair ramps or grab bars in baths.

Deductible improvements also might include widening doorways, lowering cabinets or electrical fixtures and adding stair lifts. Note: You’ll need a letter from your doctor to prove these changes were medically necessary.

7. Interest on a home equity line of credit

In the past, people used these loans to pay for college, throw a wedding, make improvements to their home and more. And they could legally deduct the interest. Not anymore, even if you took out the loan before the new tax plan.

Now if you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to “buy, build or improve a property,” according to the IRS. You’ll still save cash if your home needs a kitchen overhaul or half-bath. However, you can deduct only up to the $750,000 cap, and this is for the amount you pay in interest on your HELOC and mortgage combined.

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