June 7, 2023

4 Important Benefits to Homeownership - Part 2: Tax Breaks

Tax Benefits  

The Tax benefits of homeownership are real. Some of the top tax breaks connected to homeownership include: mortgage interest deduction, property tax deduction, imputed rent, and profits if you sell your home. Let’s take a closer look!

Mortgage Interest Deduction:

A mortgage interest deduction is a tax benefit provided to homeowners who have taken out a mortgage loan to finance the purchase of their primary residence or a second home. Homeowners who itemize deductions may reduce their taxable income by deducting interest paid on their home mortgage. Once you own a home and have a mortgage on the home, you will receive a Form 1098 for tax reporting purposes. The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. These figures are entered onto your tax return as credits for you.

Property Tax Deduction:

Homeowners who itemize their deductions on their federal income tax returns may claim a deduction for the property taxes that are paid on the primary home or a second home or vacation home (and in some areas, the property taxes may be quite high). The deduction caps may vary, but typically the cap for state/federal taxes is $10,000 for married couples and $5,000 for single homeowners (this may change over time- always double check the latest figures). The amount a homeowner may claim also depends on the assessed value of the property as well as the current tax rate.

Imputed Rent:

Imputed rent refers to the benefit that homeowners receive by living in their own homes rather than renting a home. It is the value they would otherwise have to pay in rent if they were to live in a similar property as tenants. This benefit arises from the fact that homeowners avoid paying rent to someone else and instead enjoy the use of their own property. It is important to note that imputed rent is not a cash benefit, meaning homeowners do not receive actual money. However, it presents a significant advantage of homeownership compared to renting and can contribute to long-term financial well-being.

Profits for Home Sales:

When a homeowner sells their home, the rules  for taxable capital gains go into effect. If you have lived in the primary residence for at least two of the past five years, and you sell your home, you are then eligible to write off up to $500,000 in capital gains for a married couple filing taxes and $250,000 for an individual (this figure may change over time- please check for current amounts). This write off makes a tremendous difference. So when you are looking to purchase a home, the best idea is to intend to live in the home for at least two years before selling it.

There are many more tax advantages as well– such as the Energy Efficient Home Improvement Credit or the Residential Clean Energy Credit.

As you can see, there are numerous tax benefits to owning your own home. When you are trying to decide whether or not to renew your lease, consider the many social, financial, wealth-building and tax-related benefits of homeownership.

Learn more about Ready Life can help you on your path to homeownership:  www.readylife.com