Owning a home is a dream for many people, but it also comes with many financial responsibilities. However, did you know that owning a home can also provide tax benefits? This blog will explore the tax benefits of owning a home and how they can help you save money.
Tax Benefits of Owning a Home
Deduction on Mortgage Interest
The mortgage interest deduction is home ownership's most significant tax advantage. It enables homeowners to subtract the interest they've paid on their mortgage from their taxable income.
You can claim a mortgage deduction for homes bought after December 15, 2017. The deduction is available for mortgages up to $750,000. For homes purchased before that date, the deduction is available for mortgages up to $1 million.
For example, if you have a $300,000 mortgage with an interest rate of 4%, you would pay $12,000 in interest in the first year. This means you can deduct $12,000 from your taxable income, reducing the amount of taxes you owe.
Property Tax Deduction
Homeowners can also deduct their property taxes from their taxable income. This includes state, local, and foreign property taxes. Both single and married taxpayers have a capped deduction of $10,000.
This deduction can provide significant tax savings for homeowners in states with high property taxes, such as California. For example, if you pay $12,000 in property taxes, you can deduct $10,000 from your taxable income, reducing your tax bill.
Home Equity Loan Interest Deduction
If you have taken out a home equity loan or line of credit, you can deduct the interest paid on these loans from your taxable income. The deduction has the same limits as the mortgage interest deduction.
Loans taken out after December 15, 2017, have a cap of $750,000. Loans taken out before that date have a cap of $1 million.
Capital Gains Exclusion
You can avoid paying taxes on a sure profit when you sell your main home. If you are single, you can avoid taxes on up to $250,000 profit. If you are married and file taxes together, you can avoid taxes on up to $500,000 of profit. This means that if you sell your home for a profit, you do not have to pay taxes on the first $250,000 or $500,000, depending on your filing status.
To be eligible, you must have owned and lived in the home as your primary residence for at least two years. This should have occurred within the last five years. You can use this exclusion multiple times if you meet the ownership and residency requirements.
How to Take Advantage of These Tax Benefits
Itemize Your Deductions
To take advantage of these tax benefits, you must itemize your deductions on your tax return. Instead of using the standard deduction, you need to list all your deductible expenses. These expenses include mortgage interest, property taxes, and home equity loan interest.
You will save money on your taxes if your itemized deductions exceed the standard deduction. However, if your itemized deductions are lower, taking the standard deduction may be more beneficial.
Keep Accurate Records
You must have accurate records of your expenses to claim these tax benefits. This includes keeping track of your mortgage interest, property taxes, and any other deductible expenses related to your home. Maintaining organized and easily accessible records in case of an audit is essential.
Consult with a Tax Professional
Tax laws are complex, and consulting a tax expert is essential. They can help ensure you take advantage of all available tax benefits. They can help you decide whether to itemize deductions or take the standard deduction.
Conclusion
A home can give tax advantages, like deductions for mortgage interest, property taxes, and home equity loan interest. These tax benefits can help homeowners save money on their taxes and make owning a home more affordable. If you have a house, use these tax advantages and talk to a tax expert for personalized guidance.
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This blog is not intended to and does not constitute legal or financial / investment/tax advice. North American Savings Bank does not guarantee or promise the results obtained. The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges.
