What Are the Tax Advantages of Homeownership?

Point of Interest

There are many opportunities for property owners to capitalize on the tax savings made available, so long as they organize their expenses and invest in the right tax preparation solutions. By understanding all of the tax deductions available to homeowners and ensuring you meet the eligibility requirements when filing, you can save hundreds or thousands of dollars every year and successfully maximize your tax returns.

Owning your own home is an exciting new chapter in most people’s lives, one that opens up a wide array of new opportunities. Aside from the benefits of not having to answer to a landlord or share close quarters with other apartment tenants, homeownership has other significant benefits that can pay dividends year after year. Although many new homeowners don’t realize it before purchasing their property, owning your own home makes it possible to claim a variety of tax deductions on a yearly basis. These deductions can play a large factor in reducing the total amount you owe while maximizing your tax return.

If you’re a homeowner who wants to save money on taxes, or you’re a potential homeowner who wants to know about the deductions homeownership could earn you, it’s important to take a deeper dive and educate yourself on tax benefits of homeownership and what you may be able to claim if you qualify.

Tax deductions for homeowners

Once you become a homeowner, it’s vital that you take steps to organize as many of your expenses as possible. The reason for this is that you could be eligible for several income tax deductions or credits that add up to significant reductions in the amount of tax you owe every year. Tax deductions reduce your total calculated income for the tax year, which in turn reduces the amount of taxes you owe. These deductions can often add up to hundreds or thousands of dollars, and the more organized your preparations, the more likely you are to capitalize on these benefits.

Homeowners have the choice when filing their taxes each year on how they want to calculate and take advantage of these deductions. The government will calculate standard deduction amounts that every taxpayer can choose to take. However, if your eligible expenses as a homeowner add up to be more than these standard deduction amounts, then your costs itemized could lower your tax bill even further.

Types of tax deductions for homeowners

There are several types of tax deductions available to homeowners. While you may not be eligible to claim all types of deductions each year, most homeowners are able to claim one or several of deductions below:

  • Mortgage interest
  • Points
  • Property taxes
  • Home office expenses

Mortgage interest deductions

One of the most common tax deductions available to homeowners is a mortgage interest deduction. Mortgage interest deductions allow you to calculate the interest you pay on any of your home purchase or renovation loans and deduct the amount from your total taxable income.

A mortgage interest that is paid on rental properties is also considered a tax-deductible expense and gets reported on the 1040 tax form. However, in order to claim these deductions, the homeowner’s mortgage needs to be considered a secured debt.

Learn more about mortgage rates.

Point deductions

When you purchase a new home, you may at times need to pay specific fees depending on the length and format of your financing terms. In some cases, these fees are referred to as mortgage points. Mortgage points are equal to 1% of the total amount of your loan. When it comes to home mortgages, these points are organized in two different ways — origination and discount points. Origination points come from income generated by the loan originator, and discount points, which are usually fully deductible, come from prepaid interest amounts.

At the end of the year, the government will typically allow you to deduct the full amount of your points from the tax year they were earned. However, in order to deduct any amount of points, homeowners will need to meet certain requirements. If the point cannot be deducted in a particular year, they can still be deducted in future years over the life of the loan.

Property tax deductions

Another form of tax deduction available to homeowners is a property tax deduction. These state and local property taxes can be deducted from federal income taxes and reduce the amount owed at the end of the year. Homeowners can claim tax deductions on all or a portion of these property taxes each year, so long as the owner chooses to itemize their deduction when preparing their taxes.

Home office deductions

Home office deductions are another one of the most common tax deductions that homeowners claim. Depending on the type of business you own, these tax deductions can add up significantly and help entrepreneurs save a ton of money so long they’re able to keep good records of their expenses. Home office deductions can be claimed by either homeowners or renters. So long as the space has regular and exclusive use for business needs, the costs incurred can be deducted.

Home office deductions can be complicated, so the government has created two different ways you can claim the tax credits — simplified or actual expense deductions. With the simplified deduction, you calculate the square footage of your office space and assess a $5 per square foot deduction on your taxes. When using the actual expense method, you calculate all the expenses you incur, including insurance payments, mortgage interest, home utilities and real estate taxes separately.

Things that don’t qualify as deductions

While there are many deductions homeowners can claim on a yearly basis, there are some expenses that can’t be claimed as tax-deductible. Some of these include:

  • Homeowners association dues
  • Taxes paid on utilities
  • Property taxes on an unowned property
  • Unpaid property taxes
  • Loan payments for energy-saving home improvements.
  • Any taxes transferred from selling a house.
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