The financial implications of owning a home go beyond just pride of ownership, as it can offer potential tax benefits. In the U.S., owning a home can lead to significant tax benefits, which might include deductions for mortgage interest, property taxes and home sale exclusion, among others. A financial advisor can help you determine how to take advantage for your own tax situation. Here’s what you need to know.
How Homeownership Affects Your Taxes
Homeownership can significantly impact your taxes as it changes the assets you own. The act of buying a home, selling a home and even paying costs to own the home can trigger events that provide unique tax benefits. Here are some of the most common benefits of homeownership that can directly help you in your tax situation.
Mortgage Interest Deduction
One of the largest tax benefits of homeownership is the mortgage interest deduction. This allows homeowners to deduct the interest paid on the first $750,000 of the debt that they have tied up into a mortgage. This limit is halved for married individuals filing separately.
As an example, suppose a couple has an average mortgage balance of $250,000 with an interest rate of 4%. In a given year, they could potentially save around $2,500 in taxes through this deduction alone.
Property Tax Deduction
Along with mortgage interest, homeowners can also potentially deduct up to $10,000 ($5,000 if married filing separately) from their property, state and local income taxes. Known as the State and Local Taxes (SALT) deduction, this can be a significant financial relief, especially in high property tax areas.
Home Office Deduction
The shifting trend towards work-from-home has made home office deduction highly relevant. For homeowners who own businesses and use part of their home strictly for business, it can be an accessible tax benefit. Anyone who freelances, has a side gig, works as a 1099 contractor, or has a small business can look into the tax savings this special deduction offers.
Home Sale Exclusion
When homeowners sell their primary home, the IRS provides another significant tax benefit to help incentivize sellers. If you’re selling your home and meet certain criteria, homeowners can exclude up to $250,000 ($500,000 for joint filers) of capital gains from the home sale.
For example, if a couple sells their home and realizes a gain of $200,000, this amount could potentially be tax-free.
The True Cost of Homeownership
While homeownership comes with its set of tax benefits, weighing these advantages against the overall costs is essential. The costs of homeownership can actually be substantial, especially if your home needs a good amount of work.
If you’re considering the purchase of a home, evaluating the differences in tax outcomes between owning and renting can be useful.
While renters do not have access to tax benefits such as mortgage interest and property tax deductions, they also aren’t burdened by home maintenance and repair costs. The costs can vary based on the home that you can afford and where you live.
These costs may include mortgage payments, property taxes, home insurance, maintenance, repairs or even homeowners association fees in some cases.
Understanding the money you’ll have to put into your home over time and comparing it with your tax savings can help you decide if the property cost and timing are right for you.
Bottom Line
Owning a home can be a very complex decision that requires finding the right property, the right price and the right timing. It’s not a decision to be taken lightly but one area that is very important to include in that decision-making process is the potential tax benefits. Buying a home might offer significant savings on your tax bill. With the complexities of taxes relating to homeownership, consulting with a financial advisor can make a world of difference. They offer guidance in areas such as maximizing tax benefits, planning for future tax liabilities and ensuring compliance with tax laws.
Tips for Tax Planning
- There are many tax benefits to owning a home, but that might not be the only tax strategy that you’re not taking advantage of currently. A financial advisor who specializes in taxes can help you plan accordingly to maximize your deductions and put you in a better financial situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Property taxes are an important part of tax planning when you own a home. Use SmartAsset’s free property tax calculator to estimate how much you might owe in your given county.
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