The Tax Benefits of Homeownership

The tax code provides a number of benefits for people who own their homes.

MORTGAGE INTEREST DEDUCTION

Mortgage interest is any interest you pay on a home loan for your primary or secondary home and homeowners can deduct this interest from their federal income taxes.

These loans include:

• A mortgage to purchase your home

• A second mortgage

• A line of credit

• A home equity loan

As of 2018, the deduction is limited to interest paid on up to $750,000 (IN TOTAL) of debt incurred to purchase a home. For married taxpayers filing separately the limit is $375,000.

Taxpayers who do not own their home have no comparable ability to deduct interest paid on debt incurred to purchase goods and services.

To file you will need a 1098 form, which you can get from your lender which states all the interest paid on your mortgage fr the last year. You use the information from Form 1098 to prepare IRS Schedule A— "Itemized Deductions". You then will file an IRS Form 1040.

HOME EQUITY

Also, starting in 2018, the deduction for interest on home equity debt is available only if the loan was used for home improvements. If the home equity loan is used to pay off credit card debt, you cannot claim the deduction.

What is a home equity loan?

A home equity loan is a type of loan in which the borrower uses the equity of his or her home as collateral. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lender. Under the new reform a home equity loan may not exceed the $750,000 limit.

POINTS

Most homeowners know they can deduct mortgage interest, but they may not be aware that because "points" are essentially prepaid interest, they can also be deducted! The points must be discount points, not origination points.

To be considered deductible as interest points must meet the following:

1. Secured loan by your home

2. The points paid are common for the area

3. The cash amount paid was equal to the points

EX: for a $100,000 mortgage, you pay for 2 points (2%). This means you have paid $2000 (100,000 x 2%) towards your interest - meaning this amount can be deducted.

PROPERTY TAX DEDUCTION

Homeowners who itemize deductions may also reduce their taxable income by deducting property taxes they pay on their homes. Property taxes are a local tax that can be deducted as part of the state and local taxes deduction.

This can be documented in one of two ways.

1. An escrow account: this amount may be listed on a form sent by your bank if you set aside your the amount you will need to pay monthly

2. Direct to municipality: if you pay your municipality directly for the year you will show this through your billing statements or personal records

In the recently passed tax legislation, the state and local taxes deduction will be capped at $10,000 starting with your 2018 tax return.

IMPUTED RENT

A great benefit is homeowners do not pay taxes on the imputed rental income from their own homes. Meaning, homeowners do not have to count the "rental value" of their homes as taxable income, as is done in other countries.

Unlike other investments, the ROI (return on investment) on home-ownership—what economists call “imputed rent”—is excluded from taxable income.

Landlords must count the rent they receive as taxable income and renters are not able to deduct the rent they pay. A homeowner is essentially a landlord and renter within their own home, but the tax code treats homeowners the same as renters while ignoring their simultaneous role as their own landlords.

PROFITS FROM HOME SALES

Taxpayers who sell their home must pay capital gains tax on any profits made. Homeowners may exclude from taxable income up to $250,000 ($500,000 for joint filers) of capital gains on the sale of their home if they satisfy certain criteria:

1. Must have maintained the home as a primary residence in two out of the preceding five years

2. Have not claimed the capital gains exclusion for the sale of another home during the previous two years.

MORTGAGE INSURANCE

Mortgage insurance is designed to cover the lender’s risk of loss should the borrower default on their home loan in the case where the borrower made a down payment less than 20 percent.

Tax deductions for mortgage-insurance premiums were authorized for loans acquired after 2007, but the ability for that write-off lapsed at the end of 2016. The new tax law allows for a retroactive extension for premiums paid during 2017, but nothing has been decided about future deductions, including for 2018. Unless a new bill is passed PMI won't be deductible when you file next year!

To qualify for the benefit the follow requirements are to be met:

1. The home securing the insured mortgage must be the primary residence during the tax year.

2. Taxpayers adjusted gross income must have totaled less than $100,000.

3. For each $1,000 you make after $100,00, you can deduct 10% less of your PMI, up to $109,000.

ENERGY CREDITS

As part of the 2018 Congressional budget deal, many of the expired Energy Tax Credits have been fully restored retroactively for 2017 and geothermal, wind, and fuel cells were extended through 2021 to match solar.

There are significant “Renewable Energy Tax Credits” for up to 30% of the costs of major energy installations. These credits are unlimited, and include labor on installation for the following:

1. solar water heaters

2. solar panels

3. geothermal heat pumps

4. small wind turbines

5. fuel cells

The 30% credits decline through 2021, and are as follows:

• 2017: 30%

• 2018: 30%

• 2019: 30%

• 2020: 26%

• 2021: 22%

The installations must be installed in a home you own and use as a priamary residence (no rentals, but second homes qualify).

These energy tax credits are non-refundable, but can be carried-over to a future tax filing year. More information can be found on the Energy Star Renewable Energy Tax Credits website. Prior to the Congressional budget deal, only the solar credits had remained in place for 2017 and beyond.