Key Takeaways
- The first step of filing taxes as a homeowner is to save any paperwork associated with your home and finances.
- Many of the tax benefits of owning a home changed with the Tax Cuts and Jobs Act of 2017.
- Be sure to consult a tax professional to see how changes to tax benefits of owning a home might affect you.
With the 2017 filing deadline right around the corner, the tax benefits of owning a home might be on your mind. If you are not used to filing taxes as a homeowner, you’re sure to be asking yourself questions such as “are property taxes deductible” or “what are my homeowner tax benefits.” Read on to find the answer to your most burning homeowner tax questions.
How To File Taxes As A Homeowner (And Changes You Should Be Aware Of)
In order to make filing taxes as a homeowner as pleasant of an experience as possible, you will want to save any paperwork associated with your home and finances. This could include your settlement, tax receipts, home improvement receipts, and your mortgage contract. Next, you will want to be familiar with what tax forms will be needed during tax filing season. Be on the lookout for your 1098, W-2 and 1099 forms. The Form 1098 should be provided by your mortgage lender, the W-2 from your place of employment, and 1099 forms from anyone who you hired for contracted labor. Always consult a tax professional if you have any questions about filing your taxes.
On December 22, 2017, the Trump Administration signed into law the Tax Cuts and Jobs Act (TCJA), which left many people scratching their heads on how the new regulations might affect them. The main changes you should be aware of as homeowners start off with the mortgage interest deduction, for which the cap was lowered from $1 million down to $750,000. Next, while taxpayers used to be able to deduct property taxes, they will now be included in a general state and local sales tax deduction moving forward. The cap for claiming all types of state and local taxes will be $10,000 for those filing married jointly. Homeowners who plan to take out a Home Equity Line Of Credit (HELOC), should also be aware that claims are now limited to when the loan is used for the purchase, building or improving upon a property. Finally, because the standard deduction has been doubled by the TCJA, experts believe that only a minimal amount of homeowners will itemize private mortgage insurance payments in the future.
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What Are The Tax Benefits Of Owning A Home?
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Mortgage Interest: If you’ve asked others, “what are the tax benefits of owning a home,” then most likely you have been told about the mortgage interest deduction. The way interest is amortized, mortgage payments are mostly made up of interest rather than the principal during the first few years. Because of this, being able to deduct mortgage interest payments is one of the big tax benefits of owning a home. In 2017, homeowners could deduct interest on mortgage loans up to $1 million. In 2018, the cap has been lowered to $750,000.
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State & Local Sales Tax: “Are property taxes tax deductible?” The precise answer to this popular question changes based on if you’re filing for the 2017 year, or if you’re preparing ahead for 2018. In 2017, households could deduct property taxes separately. According to the U.S. Census Bureau, the average household property tax payment was $2,127. However, the Tax Cuts and Jobs Act (TCJA) change the rules such that property taxes are no longer a separate deduction. Instead, 2018 taxpayers will make one deduction that includes all state and local sales taxes, which will be capped at $10,000 for those filing married jointly. It should be noted that the tax benefits of owning a second home is affected by this rule, as the deduction cap is across all properties owned. To answer the question “are property taxes deductible from federal income tax,” the answer will technically still be “yes,” but it will not be a separate deduction beginning in 2018.
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Private Mortgage Insurance: Private mortgage insurance (PMI) is often paid by homeowners who put less than 20 percent down on their property. In 2017, homeowners who paid PMI were able to deduct this line item from their taxable income. In 2018, the standard deduction will be nearly doubled. Experts estimate that only a small proportion of taxpayers will itemize deductions.
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Energy-Efficiency: There are tax credits available for homeowners who install solar electric and solar water heating upgrades through 2021. This is an incentive set into motion by the Residential Energy Efficient Property Credit so that homeowners would install alternative energy upgrades on their properties.
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Home Office: You may be wondering about the tax benefits of owning a home based business. Those who have a qualified home office are able to deduct $5 per square foot of office space, for up to 300 square feet, in addition to office expenses. In 2017, employees who sometimes work from home were able to make this deduction. However, in 2018, this deduction can only be used by those who strictly work from home.
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Age In Place Home Improvements: For homeowners who plan to age in their current homes, they can get a tax break for adding in safety-related renovations to their properties. Examples include wheelchair ramps, stair lifts and grab bars. Homeowners will need to provide a signed letter from a doctor to prove medical necessity. In addition, improvements must be in excess of 7.5% of the tax filer’s adjusted gross income.
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Interest On A Home Equity Line of Credit: In 2017 and earlier, homeowners who took out a home equity line of credit (HELOC) were able to deduct any interest paid on the loan. This benefit was regardless of what the loan was used for. In 2018, taxpayers will still be able to take advantage of this deduction, but only if the HELOC was used specifically to buy, build or improve upon a property.
New Homeowner Tax Benefits
One of the best new homeowner tax benefits is the Mortgage Credit Certificate (MCC.) The MCC is provided by the government, and is meant to help first-time home buyers with the cost of their mortgage. It allows those who have not lived in the home within the last three years claim a tax credit, usually about 30%, on the mortgage interest paid in that year. It should be noted that the MCC is applied as a tax credit, and no as a deduction. In turn, this allows some home buyers to afford a little more house, as lenders will use the estimated amount as additional income. The MCC can be used in conjunction with conventional loans, FHA loans, USDA and VA loans.
Tax Benefits Of Owning A Second Home
Most of the tax benefits of owning a second home are tied directly to the benefits of the first home. In other words, any tax benefits of owning a home are applied collectively to both the primary and vacation homes. For example, the new rule for mortgage insurance deduction provides a cap at $750,000, which is across all properties. If the mortgage loan for your primary residence is valued at $750,000, then you cannot claim the mortgage interest payments on the second home.
Filing taxes is viewed as such a headache by many Americans, but nevertheless it is important to be aware of the tax benefits of owning a home. Especially with the changes brought about by the Tax Cuts and Jobs Act in December of 2017, it is now more important than every to stay informed on your benefits as a citizen. Although the 2018 filing season as a year away, being in the know about the changing tax benefits will help you know what to expect and perhaps influence your home-buying decisions in the future.
What are your thoughts on the changing tax benefits of owning a home? Feel free to share in the comments below:
