The Great 8 - Tax Benefits to Owning a Home

Dated: January 13 2021

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They say home is where the heart is, and in this context, one could argue even the IRS has a heart. Now, I am not a tax professional or an accountant, so please confirm everything below with your own due diligence by speaking with a tax professional. Great, now that I have that out of the way, here we go!

1. Your Mortgage Interest is Tax Deductible: 
As of 2020, if you own a home with a mortgage at or below $750,000, you can deduct the interest you pay on that mortgage from your annual taxable income. Especially during the first 15 years of a 30 year fixed rate mortgage, during which your monthly payments mostly cover interest before any principal, your deduction would be in the tens of thousands of dollars, which is huge. Arguably, this is one of the most exciting financial benefits of home ownership, and a key argument for buying your own home rather than being a renter. 

2. The Amount You Pay in Property Tax is Deductible:
The rules are slightly different than the years before, but this is still incredibly beneficial. Things have changed slightly, and you can learn about that here. Under the new law, the Tax Cuts and Jobs Act "TCJA" of 2017, you can deduct up to $10,000 in property taxes paid. The deduction for state and local income taxes was combined with the deduction for state and local property taxes, too. There are quite a few changes that apply with the TCJA, but by and large, the key takeaway for most of us is that homeownership provides another key deduction up to $10,000 in our taxes merely by doing what we do anyway, which is make a monthly payment to a landlord or a mortgage company, and a portion of that payment goes to pay those taxes regardless. 

3. Tax Deduction on Points Paid to a Lender: 
Points are a fee a borrower pays to a lender for better terms on the loan. One point is equivalent to 1% of the loan amount being borrowed; so if you will borrow $300,000 from a lender, and they discuss charging one point, that would equal $3,000. Points can be a great benefit. Using the $300,000 example again, should your lender offer a 4% rate with 0 points, or a 3% rate but charging one point, or $3,000, your monthly payment options would be either $1,682 or $1,515, respectively, a difference of $167 per month After roughly 17 months, you will have saved enough in monthly payments to cover that entire $3,000 fee for the lower rate. You should talk to a mortgage professional directly to learn specifics of your situation, which will help you decide if paying points is to your benefit. 

But that was just the explanation of a point and how you can use them. For this discussion, the best part is points are now tax deductible. Prior to the 2017 TCJA change, points were not deductible on taxes, so this is a huge win for home owners. There are a slew of rules to this and to really get into it, you need to consult your tax pro. You can also read up on it with the IRS' Topic No. 504 Home Mortgage Points

4. Private Mortgage Insurance, or PMI, Can Be Deducted: 
PMI is another fee charged when borrowers put less than 20% down on the loan as a down payment. We don't love PMI, but in a lot of cases it is the right decision to make the dream of home ownership and wealth building a reality. The ability to deduct PMI on your taxes is always up for debate and even in early 2018, the President of the United States had to extend the right for this deduction through H.R. 1892, the Bipartisan Budget Act of 2018. So, you should still be able to take advantage of this deduction in 2020, but there are a variety of conditions you must meet, such as income limitations. Check for those here with RefiGuide.org

5. Huge Tax Free Wealth Generation Potential When You Sell: 
Process of purchasing and ultimately holding onto a house has benefits that reach beyond just that period of time in which you own the home. When you sell your primary residence, even at a huge profit, you can hang onto those profits in your own pocket without having to pay taxes on the gains. Especially with the markets we have seen of late, it is entirely possible for someone to buy a house today and sell it for double what they paid 10 years later. Well, to incentivize home buyers, the government allows home sellers who realize a $250,000 profit or less to keep those profits, tax free, if they have lived in the home for two aggregate years out of the five years prior to the sale date. That benefit increases to $500,000 for married couples. This is life changing money and one of the most frequent methods in the United States for the average American becoming a millionaire. Yes, it is not just possible, it is probable you can build massive wealth just by doing what you do anyway, pay a monthly payment for your dwelling. You can learn more about this here

6. Tax Incentives for Your Renovations!
Yes, you heard me right! Like most of us, when you buy a house, you'll want to make it "yours," meaning, your style. Well, until the end of 2021, you can still write off some energy efficient upgrades on your home, such as solar upgrades and water heating equipment. 

You can still claim tax deductions on solar energy–both for electric and water heating equipment, through 2021. The longer you wait, the less money you’ll get back though. Here's a breakdown of how much you can write off of the expenses incurred...Starting 1 January 2021, the rate goes from 25% to 22%, so hurry up! You've got less than a month from the date I wrote this blog! Check out Energy Star for further detail. 

  • Between January 1, 2017, and December 31, 2019 – 30% of the expenditures are eligible for the credit
  • Between January 1, 2020, and December 31, 2020 – 26%
  • Between January 1, 2021, and December 31, 2012 – 22%

7. Tax Deductions for "Aging in Place" and Medical Expense Deductions for Home Improvements. 
There's a lot to unpack here, and doing so would be an entire article of its own. Luckily, BoomerBaggage has already written the article! The key takeaway here is, a lot of us decide we want to live in our own homes for as long as possible, and in order to do so, especially in our golden years, our homes might require some changes. The costs of those changes can come with some tax benefits as well!

8. Working From Home Office Deduction: 
What could be more appropriate in 2020 than talking about working from home? The COVID-19 crisis has forced so many of us to stay at home, altering how we do business for now, and perhaps for the enduring future. A silver lining to this is the ability to deduct from your taxes your home office expenses as well as the the space itself. There are very specific guidelines that come along with this, which has brought with it a stigma and some concern with tax payers, as an ongoing rumor suggests deducting a home office is a red flag that could trigger an IRS audit. Intuit wrote a great article on this topic, and I highly suggest everyone read it. Regardless, and this is just this author's opinion, if the tax code exists and you're not doing anything wrong, the deduct what you can, to include your home office.

There will always be a large percentage of our population who feel it necessary to argue against home ownership, and as such, they will likely rent their homes for their entire lives, which is absolutely fine. I find it interesting that so many of them religiously try and talk others out of buying homes too. Perhaps they're afraid they'll be left behind? I don't know. However, what I do know is my first-hand experience with owning my own home and helping hundreds of others own their homes too, and the impact home ownership has had on our financial futures, for much of which I have to thank our Government and its tax benefits. As stated before, please consult a tax professional regarding your own situation. If you would like a referral to a few great ones, just let us know!

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Andy Piedra

I believe those who serve the people of our country deserve to own their own piece of our country. . . My team and I make that happen, daily. I am a Military Veteran and the founder of the Veterans Re....

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