Reap the Benefits of Home Ownership in Tax Season
Owning a home creates a haven where dinners are prepared, families are connected and memories are created. But as you may know, owning a home costs money. Fortunately, homeowner tax breaks exist to help with the expense. To literally cash in on these perks, working on your taxes becomes more complicated. You will need to utilize a Form 1040 and Schedule A, so you can itemize. However, the effort to itemize is well worth the savings earned at tax time. Let’s take a look at how your home ownership can be beneficial during tax season.
Mortgage Interest Deduction
Mortgage interest deduction often earns homeowners the biggest benefit. If you are a single filer, you can write off interest on a loan up to $500,000. As a joint filer, you are allowed up to $1,000,000. This deduction is particularly profitable during the early years of homeownership, when the majority of your payment goes straight to interest, not principal.
- Home Equity Loan: Did you take a home equity loan or line of credit in 2016? Uncle Sam can help with that. Equity debts of $100,000 or less are fully deductible.
- Second Home Mortgage: A mortgage on a second home is fully deductible as well. A boat or an RV is considered a second home if it includes cooking, sleeping and bathroom facilities.
Property Tax Deduction
The property tax deduction is another beneficial deduction. North Carolina’s median property tax is $1,209 per year for a home worth $155,500, the median home value. Fortunately, North Carolina boasts one of the lowest median property tax rates in the country, but being able to deduct this expense is still beneficial. You just need to remember this: you must take your deduction in the year your payments are made.
Some homeowners purchase points to reduce their interest rate when purchasing a home, making them eligible for yet another tax deduction. If purchased points match the industry standard and the mortgage is for a primary residence, a full point deduction can be taken immediately. If points are purchased on a refinanced loan, often the points will be deducted over the life of the loan.
Home Office Deduction
In today’s world, many professionals are freelancers or are self-employed. If you have an office solely dedicated to work, you can write off a portion of your home expenses—think water and electricity bills or phone and internet overhead. You need to track your home expenses and measure what percentage the office space is of the home’s total square footage to calculate this deduction.
Tax-Free Profit on Home Sale
Chances are if you bought a house in 2016 that you may have sold a house as well. If you did, you are in luck because some or perhaps all of the income earned from your house sale is tax-free. Here’s how it breaks down:
- If you are single and lived in the house for two of the last five years before the sale, up to $250,000 of profit is tax-free.
- If you are a married joint filer and at least one spouse lived in the house for two of the last five years before the sale, up to $500,000 of profit is tax-free.
What’s Not Taxable?
Even with all these benefits, there are some home expenses that do not make the cut. Home Owners Association (HOA) dues, additional principal payments, depreciation of your home and home repairs are not tax deductible. But hold on to your home improvement receipts.
According to a Turbo Tax article,
When you sell your home, the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home for tax purposes. Although most home-sale profit is tax-free, the IRS could tax some profit, so tracking your basis could lessen a potential tax bill.
Homeowner tax breaks come and go, so it’s important to stay up to date. Go Bank Rates states these two significant energy deductions were eliminated January 1, 2017:
- Nonbusiness Energy Property Tax Credit, covering 10 percent of the cost of qualified home energy-efficient products between $50 to $500.
- Residential Energy Property Tax Credit, equaling 30 percent of the cost of installing renewable energy sources.
Enjoy the Perks
Homeownership definitely comes at a cost, but most homeowners would say the benefits far outweigh the bills. It’s the same with starting to itemize your tax bill. If you do, you will reap greater benefit. The slightly more complicated tax process will offer you substantial savings and a less stressful tax season, enabling you to spend more time enjoying your beautiful home.
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