Five potential tax benefits of being a homeowner
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Owning your own home can be expensive. The cost of repairs are all on the homeowner. Property taxes, HOA dues and other costs expected and unexpected have a way of cropping up at the worst possible time. It can be a headache.
But it’s yours. Buying a home helps you build equity, taking you out of the cycle of renting something that is not and likely will never be yours. The struggles can be real, but there are some tax advantages homebuyers may not know about that make the headaches more than worth it.
1. Mortgage Interest Deduction
Most homeowners can deduct the interest payments they make on their mortgage from their taxable income. The mortgage interest deduction allows homeowners to deduct the interest paid on their mortgages to buy, build or improve their main or second home. Homeowners can fully deduct the amount of mortgage interest paid, up to $750,000 of indebtedness if filing jointly and $375,000 of indebtedness if filing single.
2. SALT Deduction
The state and local tax (SALT) deduction lets homeowners deduct certain taxes paid to state and local governments, provided they itemize these deductions on their federal return. Homeowners cannot claim these deductions if they take the standard deduction on their tax return.
3. Residential Energy Credit
There’s an eco-friendly tax break for homeowners, known as the residential energy-efficient property credit. The incentive applies to energy improvements made to a home, which might include installing solar panels and wind turbines, among other energy-efficient upgrades. The credit received is based on the cost of installation and when these systems were put into service.
4. Mortgage Credit Certificates
Low- to moderate-income and first-time homebuyers may be eligible for mortgage credit certificates (MCC) offered by their state’s Housing Finance Agency (HFA). If the buyer meets the requirements, the MCC sets the credit at between 10% and 50%, based on mortgage amount and mortgage interest rate. There is a cap of $2,000 on the credit. The MCC and Residential Energy credits differ from deductions in that they reduce the overall tax bill.
5. Mortgage Insurance Deduction
If you pay for mortgage insurance as part of your monthly mortgage payment, you may qualify to deduct that expense from your taxable income. Mortgage insurance protects your lender if you can’t repay the loan and go into mortgage default. If a down payment of less than 20% is made, the buyer will most likely be paying Private Mortgage Insurance (PMI). The good news: You might be able to deduct your PMI payments if you took out a loan in 2007 or later.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.