When coming up with your monthly budget, don’t forget about the income tax savings. Compared to renting, you may see a significant tax advantage. Owning a home can be a smart financial investment and a great way to build your equity. But another substantial benefit can involve a bigger break on Tax Day.
Whether you own now or you’re thinking about buying, tax season is the best time to become familiar with the financial benefits of owning a home. Below are the common categories the IRS lists as deductible expenses when it comes to homeownership.
Fire and comprehensive insurance coverage, title insurance, depreciation, and the cost of utilities such as gas, electric and water are among the items you can’t deduct. But don’t worry—there are plenty of other ways to reduce the amount you owe Uncle Sam.
Home mortgage interest
The most significant tax break for many homeowners is the ability to deduct mortgage interest. Assuming you took out a loan to buy your primary home, this applies to you. The entire portion of your payment for mortgage interest can be deducted by itemizing on Form 1040’s Schedule A.
Don’t worry about calculating this amount yourself—your lender will send you a Form 1098 in January that lists the mortgage interest you paid the previous year. Deductions can be limited, however, if your total mortgage balance is more than $1 million or you took out the mortgage for reasons other than to buy, build or improve your primary home.
If you paid “points” as you obtained your home loan—this is occasionally done to acquire a lower rate—you can deduct the full amount paid for the year if you meet a variety of criteria laid out by the IRS.
Real estate taxes
As the IRS notes, most state and local governments charge an annual tax on the value of real property. Fortunately, this amount, which varies from state to state, can be deducted. The higher rate your state charges in property taxes, the more you can recoup when filing.
Mortgage insurance premiums
Lastly, homeowners can deduct the expense of MIPs that result from buying a property with less than 20% down. However, MIPs paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. And, if your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct MIPs.
If you’re looking for more specifics as you prepare to file, check out the Tax Information for Homeowners publication.
While these cover the basics, there are additional ways that savvy homeowners can take advantage of various provisions. You can ask your tax preparer how much you might save or let us know if we can help to calculate approximately what your write off would be!