If you own a home, you’re already building equity and enjoying a significant investment that could give you some pretty serious returns in the future.
When it comes to filing your taxes, are there any advantages to owning a home?
Read on to learn more about the facts and find out if there is an actual tax advantage if you own your home versus renting.
The Mortgage Interest Deduction
Many homeowners love the idea of being able to deduct the interest they pay toward their mortgage on their annual taxes. However, some changes in the law have made this once-popular deduction a tricky endeavor.
The passing of the Tax Cuts and Jobs Act in 2017 changed the way homeowners can deduct mortgage interest on their tax returns.
Since the new law passed, the standard deduction for people who are single or married filing separately is $12,000. It’s $18,000 for heads of households and $24,000 for married couples filing jointly.
With these new high standard thresholds, it no longer makes sense to itemize mortgage interest for many homeowners.
Unless you’re paying more than these new standard limits, you won’t really see any new tax benefit if you itemize the mortgage interest you’ve paid throughout the year.
If you are able to itemize this as a deduction, you’re probably paying way too much mortgage interest in the first place, and you won’t see much in the way of a tax benefit.
This new change doesn’t mean that there is no tax advantage to owning a home. It just means that the once-beloved mortgage interest deduction no longer holds as much weight as it did in the past.
Is There a Tax Advantage to Selling Your Home?
If you decide to sell your home, it may have some tax-related implications, or it may not. For example, if you end up selling your home at a loss, you’re not allowed to file this as a deduction, which means there’s really no way to recover or benefit from losing money on a home sale.
If you sold your home for a profit, the gain is equal to the adjusted basis of the sale of your home in addition to any amount you paid for home improvements.
Any property depreciation that has been claimed as an income tax deduction will be deducted from the amount of profit to lower your bottom line.
You can be excluded from paying capital gains tax up to $250,000 regardless of filing status. This gain must be from the sale of your primary residence, and some people may be excluded up to $500,000 if they’re married and filing jointly.
This capital gains exclusion can only be used every other year, and the home must have been used for at least two out of five years as your primary residence before the sale took place.
If you moved because of your job or had other unforeseen circumstances, you could still be eligible for the exclusion. It’s a good idea to talk to a tax professional if you’re considering including the sale of your home on your annual return.
Using Your Home as an Office
One significant tax advantage for small business owners is the ability to deduct some of the square footage of the home if it’s used as an office.
To get this deduction, one space in the home must be dedicated solely to performing business-related activities.
When you choose this deduction, you can use the simplified method or calculate the percentage of your home that is used for business.
The IRS has a set dollar figure per square foot that can be used on your tax return as a deduction.
The guidelines for home office use change each year, so make sure you’re aware of any updates. This deduction will help to reduce your taxable income, resulting in a higher refund.
Don’t forget to include other things such as the cost of doing business and your utility bills, the Internet, and other services you pay for as long as they’re used for business purposes only.
Deducting Property Taxes
You may also be able to reduce your taxable income by deducting any property taxes you pay for your home. This form of the deduction is essentially just transferring federal funds to local jurisdictions that impose a property tax on homeowners.
Similar to your mortgage interest deduction, this may not be something you can include on your return. That’s because the Tax Cuts and Jobs Act put a cap of $10,000 on any state and local taxes you can deduct.
This cap includes other taxes like property taxes you may pay for your vehicle if it applies to where you live.
Take a close look at how much you’ve paid in property taxes for the year. If you live in a high-tax state, you could still benefit from this deduction if you’re paying more than $10,000 per year for property tax.
Being a Homeowner and Taxes: Is it Really Beneficial?
In terms of a tax advantage, owning a home has a few small perks, but it’s not what it used to be. Thanks to new laws, homeowners can deduct less each year, meaning that their property won’t give them many tax benefits.
That doesn’t mean that owning a home is a bad idea. It merely means that you shouldn’t purchase a home based on tax advantages alone.
If you have questions about tax law or you need experienced tax attorneys, visit our website and contact us today for a free case evaluation.