Homeownership is something that comes with a wide variety of benefits that you may not fully comprehend until you’ve made such an investment. While it is a major investment, many new homeowners find that purchasing a home makes for a very exciting time in their life. While renting an apartment has its advantages, owning a home provides you with stability and security knowing that your mortgage payments are contributing to a long term equity investment rather than your monthly payments being lost on rent.
An oftentimes overlooked benefit of owning your own home is that you will finally have full control over your property giving you full control over home additions, modifications and alterations that make your home more enjoyable to live in. As a homeowner, you can add all kinds of fantastic improvements to your home — which range from painting the walls in your preferred colors to adding an entire room onto the layout.
Along with the many lifestyle benefits that come with owning a home, there are also numerous tax benefits that are only available to homeowners. From being able to deduct mortgage interest to living in a home rent free, you’ll save a substantial amount of money that you otherwise wouldn’t have when living in an apartment or rental property. The following takes a closer look at nine of the major tax benefits for homeowners!
1. Live in a home Rent Free (Imputed Rent)
While you will be required to pay monthly mortgage payments, owning a home provides you with the ability to live in a home rent free, which is referred to as imputed rent. When you invest in a home, you have the ability to live in the home yourself or rent it out to others. When you live in the home that you’ve purchased instead of renting it out, you won’t be required to pay for rent even though you are essentially a landlord. This money that you save is excluded from taxable income. If you were a landlord at an apartment building, any money that you received would be counted as taxable income. While most homeowners often overlook this tax benefit, it’s among the most advantageous compared to renting an apartment.
2. Home Improvements are Included in Cost Basis for Taxes
If you plan on making home improvements during your time as a homeowner, you’ll be able to benefit later on when you sell the home since home improvements are included in cost basis for taxes. While cost basis can be difficult to understand, this term refers to what your home is valued at for tax purposes. Whenever you purchase a home, the cost basis for this home is valued at the amount you paid for the property. If you purchased a home for $400,000, this will be the cost basis when you first become a homeowner. Some of your closing costs when purchasing the home will also be added to the cost basis.
When it comes to improvements you make to your home, it’s essential that you save all of your receipts and other records pertaining to the improvements, which could include anything from landscaping improvements to the addition of storm windows to the property. While you won’t be able to deduct these expenses immediately, the total cost of these improvements will eventually be added to the cost basis of your home when you decide to sell it. If the cost of your home was initially $400,000 and you made $100,000 worth of improvements over the years, this amount will be added to the cost basis of the property. If you eventually sell the home for $600,000, you will then subtract the cost basis from the sale price, which will leave you with $100,000 in profit. Any profit over $250,000 can be taxed, which means that adding to the cost basis with home improvements may decrease your taxable profits which may help you stay under the $250,000 threshold and retain more money on the sale of the home.
3. Deducting Mortgage Interest
One of the major deductions that you can make on your taxes once you purchase a home is to deduct the interest of the mortgage from your income for the year, which can make for a sizable reduction on the taxes that you owe. When looking specifically at the tax year of 2018, it’s possible to deduct interest on up to $750,000 of debt that was incurred from acquiring or improving a home. While this is a reduction of the $1 million limit for previous tax years, it’s still a sizable amount that should allow you to save some money. In order to deduct the interest from your mortgage, you will be required to fill out form 1098, which will list the amount of interest that you paid on your mortgage during the previous year. This amount can then be deducted on Schedule A. Keep in mind that this is only possible if you itemize deductions.
Purchasing a home allows you to potentially garner points that can eventually be used as a deduction on your taxes. When you first obtain a mortgage, you will have the ability to purchase mortgage points, which are an addition to the down payment that you make. One point is typically equal to one percent of the total mortgage loan, which means that you would provide the lender with $3,000 for one point on a $300,000 loan. Whether you purchase one or five points, these mortgage points have the benefit of lowering your interest rates on the mortgage as well as your monthly payment. You will also be able to use these points as a deduction, the amount of which will be displayed on form 1098. This form also displays the mortgage interest that you can deduct.
5. Profit From Home Sale is Tax-free
While many of the tax benefits on this list will be beneficial to you in the immediate aftermath of purchasing the home, one of the long-term benefits that’s derived from being a homeowner is that any profit from a future sale of the home is 100 percent tax-free. As long as you’ve lived in the home for at least two out of every five years since you purchased it, you’ll be excluded from paying taxes on profits from the home for up to $250,000 if you’re single and up to $500,000 if you’re married, which provides you with the perfect opportunity to put a sizable down payment on your next home or invest in some other area. If you didn’t live in the home for at least two out of every five years, you can still take advantage of this tax benefit. However, the amount of profit that’s tax-free is much lower.
6. Property Tax Deductions
A notable tax benefit that you’ll be able to use each year as a homeowner is making a deduction on your property taxes. In most cases, you will pay these property taxes through an escrow account wherein the taxes are applied to the monthly mortgage payment and handled by the lender. At the end of the year, you will receive the IRS form 1098, which will display how much you paid in property taxes. You can then deduct this amount from your taxes. However, keep in mind that you can only deduct up to $10,000 in taxes each year with the new tax law that took effect in 2018.
7. Rewards for Energy-Efficient Upgrades
As a homeowner, you’ll be able to make all kinds of fantastic upgrades to your home. When you decide to make upgrades, it’s highly recommended that they are energy-efficient ones in order to improve the value of your home and save on your monthly utility bills. By implementing energy-efficient upgrades into your home, you’ll be able to obtain rewards in the form of credits. Compared to deductions, tax credits are applied to the exact amount of income tax that you owe for a given year as opposed to simply reducing your adjustable gross income.
When you make energy-efficient upgrades to your home, it’s possible to receive energy tax credits that are worth up to $500. If you owe $3,500 in income tax, you would be able to take $500 off and only owe $3,000. The tax credits are allotted in a variety of ways. For instance, you’ll receive a credit for 10 percent of the total costs of energy-efficient upgrades to windows, skylights, roofs, insulation systems, furnaces, air conditioners, and heat pumps. An entirely separate tax credit can be obtained if you upgrade to solar-powered generators.
8. Home Equity Loans
A home equity loan is a type of mortgage that allows you to pay off a wide range of expenses such as making improvements to your home. If you’ve lived in a home for 10 or 15 years and have paid off half of your initial mortgage, a home equity loan allows you to borrow against the current value of the home. Simply subtract the amount you still owe on your mortgage from the current value of your home. The amount that you end up with can be used as a line of credit. With the tax changes of 2018, you can deduct the interest on up to $100,000 of debt you owe with the home equity loan. However, this interest can only be deducted if the loan is used to build, improve, or purchase a home.
9. Private Mortgage Insurance
Private mortgage insurance is a type of mortgage insurance that can sometimes be applied to conventional loans in the event that your initial down payment is lower than 20 percent of the total cost of the home. This insurance protects the lender in the event that you stop making payments on your loan. While you can pay for this insurance in a variety of ways, the most common payment method is via a monthly premium, which is added directly to your monthly mortgage payment. You can then deduct these payments once you file your taxes. Keep in mind that this is only applicable to taxpayers with an adjusted gross income that’s less than $100,000. This tax benefit has also yet to be renewed following the 2017 tax year, which has been known to happen from time to time. It will likely be renewed in the coming years.
When you’re a homeowner, you have an array of opportunities to save money that you otherwise wouldn’t have access to. While purchasing a home is a sizable investment, the major tax benefits that you receive should make you much more confident in going forward with such an investment. From the immediate deductions to the ones that you’re provided with upon sale of the home, you’ll continue to save money for years to come!
If you’re currently considering purchasing a home or if you’re simply exploring your options as a prospective homeowner, feel free to reach out to our team of local Tucson real estate professionals — contact us today with any questions you may have and we’re more than happy to assist you with your home buying journey!