The Tax Benefits of Purchasing a Home

The Tax Benefits of Purchasing a Home

You know that owning your home gives you freedoms you don’t have as a tenant. You also know that when you make payments on your home you’re building a financial nest egg in the form of equity – and when you pay rent you’re building that nest egg for a landlord.

Did you know that owning your home can also reduce the number of dollars you pay in Federal and State income taxes? It does so by giving you six different Schedule A deductions.

– Read related: How Do I Sell My San Antonio Home Fast?

The first and largest deductions are mortgage interest and interest on a home equity line of credit, if the money was used to make improvements or repairs to your home. Because of the way these loans are amortized, the first few years you’re paying almost all interest, so this deduction is most valuable to you in the first years after your home purchase (or refinance).

Non-homeowners often don’t itemize their income tax deductions, opting instead to take the standard deduction because their other deductible expenses are less. (This year, the standard deduction for a married couple under 65 years of age is $12,600.)

Your end-of-year mortgage statement will tell you how much you paid in interest in 2016. Your Home Equity Line of Credit lender will send a similar statement.

Even if these two together don’t add up to the standard deduction, don’t stop here. There are more deductions…

Your property taxes. These are often paid by your lender through an escrow account, so take another look at that year end statement to see how much was paid in 2016. Add that amount to the interest you paid.

Private mortgage insurance. If you put less than 20% down when you purchased your home, you’re probably paying for private mortgage insurance (PMI). This costs from 0.3% to 1.15 of your mortgage balance, so check that statement yet again. How much will you save? Every situation is a little bit different, but as an example: If you make $100,000 per year and made a 5% down payment on your $200,000 home, you’re paying about $1,500 per year – and this year it’s still deductible. This deduction is set to expire, so unless Congress renews it, 2016 is the last year for this deduction.

Home Improvements to Age in Place or accommodate a handicapped family member. Should you need to install a wheelchair ramp or grab bars, widen a doorway or hall, lower cabinets, install wheelchair accessible fixtures, modify door hardware, or even grade the exterior ground to allow access for yourself, your spouse, or a dependent, you can deduct the amount by which the cost of the improvements exceeds the increase in your home’s value. Consult with your REALTOR® and/or a local appraiser to determine this value.

The apparent “catch” to this deduction is that you must reduce your deduction by 10% of your adjusted gross income (or 7.5% if you’re over 65). However, they don’t stand alone. These expenses are added to those for doctors, dentists, medications, health insurance, and even travel to and from your medical providers.

Energy-efficient upgrades. With the exception of the credit for solar panels, which runs through 2019, this is another deduction that is set to expire with the 2016 tax year. Under the Renewable Energy Efficiency Property Credit, you can claim a credit for up to 30% of the cost of solar panels and wind turbines. You can also claim a tax credit of up to $500 for the installation of new San Diego HVAC systems, energy-efficient windows and storm doors, water heaters, etc. The EZWindowSolutions.com website may be a good solution. This one is an actual credit against the taxes you owe, so read the instructions for IRS form 5695 to see if any improvements you made in 2016 qualify.

Your home office. If you actually do work at home and have a set-aside space in which to do so, you can take a deduction on Schedule C. You can claim up to 300 square feet of your home as office space, as long as you follow the rules. Talk this one over with your tax accountant to be sure you “get it right.”
Schedule C deductions, by the way, are even more fun than itemized deductions on Schedule A. That’s because you’re reducing your business income, and thus reducing the dollars you’ll owe for Self-employment tax.

By the time you add these homeownership deductions to those for medical expenses, charitable contributions, job expenses, and other miscellaneous deductions, owning your home could save you thousands of dollars on April 15.

Mortgage Banker