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The Surprising Tax Savings of Being a Homeowner
Dated: June 19 2020
Tax season isn’t always met with positivity. But when you’re a homeowner, you tend to view tax season differently. That’s because of the tax benefits of being a homeowner.
With tax season soon upon us, we wanted to share some of the lesser-known tax benefits of owning a home. If you missed out on the tax breaks for 2019, don't to worry! You can still benefit in the coming year! Come to think of it --the sooner you purchase a home, the longer you can rake in those benefits!
Interest Paid on Your mortgage is Deductible (in most cases)
Generally speaking, if your mortgage is not greater than $750,000, then you can deduct the interest paid on the loan. This is the most significant benefit of owning a home and claiming it is relatively simple. At the end of the year, your lender will give you the IRS Form 10998 that details the amount of interest you paid for the year.
If you just purchased your home, also remember to include any interest-related taxes from closing the loan.
Property Taxes are Deductible Too
It’s true! You may be able to deduct as much as $10,000 in paid property taxes from your state and local taxes.
If your property taxes are included in your mortgage payment, then your lender will pay your taxes through an escrow account on your behalf. Just like any tax paid from interest, you lender will list the amount of property tax you paid on the IRS Form 1098
If you live in an area where you pay property taxes directly to the municipality, then make sure to keep a record of the payment. An official receipt from that details the amount or a copy of the check should suffice but consult your tax preparer for more details.
In some instances, during the purchase of a home, the seller will ask you to include a portion of the property taxes in the closing costs. This is also deductible! Just remember to keep a record of the payment.
Mortgage Points Can Also Be Deducted
Points are discounts that you pay upfront to lower your interest rate. The discounted “point” is expressed as a percentage. One point typically equals a 1.5% reduction in your interest rate.
There are certain caveats to this discount. According to the IRS: “You can deduct points paid for refinancing only over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.”
Again, since we’re not the tax experts, you’re going to want to review this with your tax professional.
Private Mortgage Insurance (PMI) May Qualify As A Tax Deduction
PMI is a fee you pay with conventional loans when your downpayment is less than 20%. When it comes to claiming this fee as a deduction, it comes down to when the loan was taken out, your gross income, and your marital status.
If it meets the qualifying standards, it can help recoup some of the PMI fees from putting less than 20% down.
As of the writing of this article, this discount is still available, but tax laws change every year, and the deduction may not be there next year.
You'll want to discuss qualifying factors further with your tax preparer.
Energy-Efficient Upgrades Also Have Tax Incentive
Purchasing energy-efficient appliances are great for reducing your carbon footprint as well as saving on your energy bill. But when you’re also a homeowner, going green also means getting back some green.
Here are the guidelines for the percentage of the equipment you can deduct based on when it was installed.
- Between 01/01/2017 - 12/31/2019 – 30% of the expenditures were eligible
- Between 01/01/ 2020 - 12/31/2020 – 26% are eligible
- Between 01/01/2021 - 12/31/2021 – 22% are eligible
What are your thoughts about the tax benefits of owning a home? What did we miss?
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