Aside from basking in the joy of dropping a troublesome landlord and dealing with rising rents, plus several other benefits, homeowners could be eligible to receive various brownie points from Uncle Sam in the form of tax credits and deductions.
Here's a list of some common tax incentives that may come along with homeownership.
Home Mortgage Interest Deduction
Homeowners — both single and married — are eligible to deduct interest paid on "qualified residence" loans (originating after after Dec. 15, 2017) up to a limit of $750,000. For a married homeowner filing a separate return, the limit is $375,000. The Internal Revenue Service defines a qualified residence as a taxpayer's main home or second home.
It's important to note that the interest paid on all home loans, including home equity loans, that are used to buy, build or improve a main home or second home can't exceed the limits mentioned above; there aren't separate limits for each loan.
Property Taxes Deduction
Property taxes paid at the state and local level are eligible for a $10,000 deduction, or $5,000 for married taxpayers filing separately. This deduction applies to income and sales taxes as well. Foreign property taxes aren't eligible for a deduction.
Mortgage Interest Credit
This tax benefit is available to lower-income homeowners who meet certain qualifications. If you received a mortgage credit certificate from your local government, you may be eligible to claim a portion of the mortgage interest you pay as a credit.
Local governments only issue MCCs on new mortgages that are used to purchase a taxpayer's main home, and the government entity must be contacted about obtaining an MCC prior to a borrower taking out a mortgage.
Keep in mind that if you claim this credit, it counts against your home mortgage interest deduction, according to the IRS.
Mortgage Points Deduction
Points paid at closing to buy down your mortgage interest rate may be tax-deductible.
Homeowners are eligible to deduct mortgage points if they adhere to the following guidelines:
- Your primary residence secures the mortgage you're borrowing.
- Paying mortgage points is an established business practice in the area where the loan was made.
- The points paid weren't higher than the amount charged locally.
- You report income in the year you receive it and deduct expenses in the same year you pay them.
- The points paid weren't for items that are usually listed separately on a settlement sheet. These items include attorney fees, property taxes, title fees, etc.
- The funds you provided at the closing table or before closing were at least equal to the points charged. Borrowing from your lender or mortgage broker to pay points isn't allowed.
- You took out a mortgage for the purpose of buying or building your primary residence.
- The points were calculated as a percentage of the total mortgage amount.
- The amount you paid on points is clearly identified on your settlement statement.
Home Office Deduction
Taxpayers who use a dedicated space in their home for business activities might be able to deduct related expenses.
There are two options for calculating a home office deduction amount: simplified and regular. The simplified option involves multiplying a prescribed rate by the allowable square footage of the office, and the regular method involves determining actual home office expenses.
A home must meet basic requirements to qualify for the home office deduction. The first is that a part of the home must be used regularly and exclusively for business, and the second is that the home must be used as the principal place of your business.