10 months, 3 weeks ago
As mortgage consultants, we’re often asked about the tax deductions that may be available through owning a home. Before we list some of the tax benefits, it’s important to first explain what a tax deduction is. A tax deduction is simply a reduction in your taxable income. For example, if you made $75,000 in taxable income, a $10,000 tax deduction would reduce your taxable income to $65,000 ($75,000 - $10,000 = $65,000). If you were in the 25% tax bracket, a $10,000 tax deduction would result in a $2,500 tax savings ($10,000 * 0.25 = $2,500). The good news is that home ownership can provide some significant tax benefits. Here are some of the tax deductions that may be available.
- Mortgage Interest Deduction. Under the new tax laws that went into effect on January 1, 2018, the interest paid each year on your mortgage may be tax deductible up to $750,000 in mortgage dept incurred to purchase of improve a primary or second home, if you are single or married filing jointly.
- Note:The new tax code includes a “grandfather” rule which allows for interest deductibility up to the previous loan limit of $1 Million to still apply for mortgage debt incurred to purchase or improve a primary or second home if it meets one of the following:
- Debt was incurred before 12/16/2017 OR
- The binding contract to purchase a home was in effect before 12/16/2017 AND the home purchase closed before 4/1/2018
- Another “grandfather” rule also includes a provision that allows for a new refinance of home acquisition debt that was taken out prior to 12/16/2017 as long as the principal balance of the new loan does not exceed the balance of the loan they are refinancing.
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- Property Tax Deduction. Real estate taxes may be deductible up to a certain $$ amount based on what other state/local taxes you pay. Under the new tax law that went into effect on 1/1/2018, the maximum deduction for personal state and local taxes (which include real estate taxes) is generally $10,000.
- Purchase Costs Deduction. Loan discount points and origination fees may be tax deductible. Any "daily interest" paid on the mortgage at closing may also be deductible. We’ll provide you with your final closing statement after close of escrow.
- Capital Gains Exclusion. Married taxpayers who file jointly may be able to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence two out of the prior five years. Single and married filing separately may be able to keep up to $250,000 each tax free.
- Home Equity Loan Interest Deduction. The interest you pay on a home equity loan or line of credit for a primary or second home (if used for acquisition or improvement costs) may be deductible up to the applicable limits based on when the property was acquired.
- Home Improvement Loan Interest Deduction. If you take out a loan on a primary or secondary residence for a significant home improvement, you may be able to deduct the interest up to the maximum allowable limits. Check with www.irs.gov and a tax professional for the improvements that qualify.
The items listed above are some of the larger tax deductions that come with home ownership. However, additional tax benefits may exist. We always advise that tax matters be reviewed with a tax professional. We hope that you find this information useful. Please feel free to call or email with any questions.
-The Kavanewsky Team