Updated: Jun 22
Home ownership can offer significant tax benefits. Keep in mind that most of these tax deductions only work if they are itemized deductions. This means you must have more deductions than the standard deduction of $12,400 for the 2020 tax year.
Mortgage Loan Interest Deduction
Home mortgage interest and mortgage points can be deducted from your taxes. Since for most homeowners the mortgage interest is their largest monthly payment this can be a huge help. The mortgage interest deduction is capped at loans up to $750,000. If you are filling separate as a married couple, than you can only claim half of that. This tax break not only works on your primary mortgage but also for home equity loans also known as HELOCs. Fortunately or unfortunately, interest rates have fallen so low, that this doesn't save as much money as it used to. mortgage points occur at the time of the home purchase or when you refinance. They give you the ability to lower your interest rate by paying more as an upfront fee.
Property Tax Deduction
Many state and local taxes charge property taxes. These taxes can be deducted up to $10,000. This limitation hurts those in states with high property taxes such as New York or most of New England. When filing your tax return, it is important to file with Form 1040 schedule A.
Mortgage Insurance Tax Deduction
This tax deductible generally applies to first time home buyers. When you have down payment of less than 20%, you are generally required to pay private mortgage insurance (PMI). This is allowed to be deducted when it is your primary home or a secondary home that you are renting out. Your adjusted gross income (AGI) must also be less than $100,000 for the full deduction of $109,000 for a partial deduction.
The IRS allows for the non-business energy property credit which is limited to 10% of the cost of your qualifying credit. Some items that qualify are skylights, insulation systems, certain appliances, and HVAC system. These helpful tax breaks can not only help you be green but save you money on your tax bill. Here is the IRS document to help see if you can reduce your tax bill.
Home Sale Tax Exclusion
This is likely the largest tax help you can get with owning a primary residence. Normally when you sell real estate you are required to pay capital gains tax. However the home sale tax exclusion allows for you to exclude $250,000 or $500,000 if married filing. This does have some qualifications such as the home must have owned and used your home for two of the previous five years. You also could not have taken this deduction with a different home within the previous two years.
If you do not qualify for the home sale tax exclusion keep all the receipts for your home improvements. When you sell the home you will be required to pay capital gains taxes but you can write off the items that added home value but cannot deduct home repairs. It is also important to work with someone who is familiar with your tax professional as you may be required to file quarterly with the IRS due to the large capital gains in order to avoid a penalty at the end of the year.
TAX DEDUCTIONS PER INCOME BRACKET
Taxes deductions become more prevalent if you are part of a higher tax bracket. If you can deduct $20,000 in the 37% bracket it will save you $7400 in federal taxes, however if you are in the 22% bracket, you will only save $4,400 on your tax return. It is important to remember that although you can help save money on your federal income tax, you are still paying something for the home. For this reason, it is important to only purchase a home you can afford and not just for a the multitude of tax breaks.
What closing costs are tax deductible 2020?
IRS publication 530 does a great job at outlining what is and is not deducible with closing costs. For a quick review, mortgage points are seen from the IRS perspective as prepaid interest and is deductible. Loan origination fees are also considered tax deductible. Things that are not deductible are prepaid home fire insurance or trash pickup services.
Who should claim House on taxes?
The individual who has paid for the house is the one that should claim it on their taxes. This is important for unmarried couples who both live in a home. The optimal way to save on taxes, is for the higher income individual to have paid these deductions. This assumes that they have enough deductions to itemize above the standard of $12,400 for an individual in 2020.
Will my tax refund be higher if I bought a house?
It is possible for a higher tax refund if you purchased a house although this would assume that you have utilized the tax deduction outlined above. It would also be important to note that you will also have to exceed the current standard deduction of $12,400 for an individual in 2020. If you fall below that threshold the itemized deductions will not change anything.
There are a plethora of real estate tax deductions out there. If you are looking to pursue home ownership, your top Denver real estate agent is only a click away!
jefflos.com does not provide financial or tax advise, Tax laws do change and it is important to consult with your tax professional to find out if you qualify for any of these tax deductions.