As you prepare to file your taxes, you might be wondering if there are any benefits when it comes to owning a home? You also could be wondering how the new tax plan might affect the tax perks of homeownership when you file next year. Here, Realtor.co offers a complete guide to all of the tax benefits of owning a home—for this filing year (2017) as well as the next (2018).
1. Mortgage interest
The ability to deduct the interest on a mortgage of up to $1 million continues to be the biggest benefit of owning a home for tax year 2017. And the more recent your mortgage, the greater your tax savings. For example, a married couple in the 28-percent tax bracket (with a joint annual income between $151,201 and $230,450) who bought a home with a $300,000, 30-year mortgage at a 4-percent interest rate will pay $11,904 in mortgage interest their first year. Once you add in additional itemized federal deductions, these homeowners can expect to save at least $3,333 in taxes during their initial year of ownership. The new tax bill allows homeowners with a mortgage that went into effect before Dec. 15, 2017, to continue to deduct interest on loans up to $1 million. But for anyone who closed on a mortgage after that, the cap for deducting interest becomes $750,000—and that’s a combined total for first, second, and any other homes.
2. Property taxes
In most cases, property taxes are deductible on your 2017 tax return. That could mean big savings. According to the U.S. Census Bureau, the average household property tax is $2,127. If you have a mortgage, your taxes are built into your monthly payment. Next year, property tax will not be a separate deduction. Instead, taxpayers can take one deduction that includes property tax, as well as state and local sales and income taxes. That single deduction is capped at $10,000 for those married filing jointly.
3. Private mortgage insurance
If you put down less than 20 percent on your home, you’re likely paying private mortgage insurance (or PMI), which makes up 0.3 percent to 1.15 percent of your home loan. Although the deduction had expired, the new tax bill retroactively made the deduction available for the 2017 tax year. Wondering how much you might save? If you make $100,000 and put down 5 percent on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and cut your taxable income by $1,500. In 2018, this deduction is for itemizers only. Plus, the 2018 tax law nearly doubles the standard deduction.
4. Energy-efficiency upgrades
The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016. However, credits for solar electric and solar water heating equipment still are available through Dec. 31, 2021. With the new tax bill, the percentage of the credit varies based on the date of installation. Thirty percent of the expenditures are eligible for the credit for equipment installed between Jan. 1, 2017, and Dec. 31, 2019. That is reduced to 26 percent for installation between Jan. 1 and Dec. 31, 2020, and then 22 percent for equipment put in between Jan. 1 and Dec. 31, 2021.
5. A home office
Your office space and expenses can be deducted if you work from home. That means you can take a $5-per-square-foot deduction for up to 300 square feet of office space, which amounts to a maximum deduction of $1,500. Next year, this deduction will be eliminated for employees who have an office to go to but work from home occasionally. However, it remains for all self-employed people whose home office is the main place they work.
6. Home improvements to age in place
Many older homeowners plan to age in place, and if that involves renovations such as wheelchair ramps or grab bars in bathrooms, the cost of these improvements results in a nice tax break. Deductible improvements also might include widening doorways, lowering cabinets or electrical fixtures and adding stair lifts. Note: You’ll need a letter from your doctor to prove these changes were medically necessary. Furthermore, in 2017 these home improvements will need to exceed 7.5 percent of your adjusted gross income. So, if you make $60,000, this deduction only kicks in if you’ve spent more than $4,500. This will not change next year.
7. Interest on a home equity line of credit
If you took out a home equity line of credit (or HELOC) in 2017 or earlier, the interest you pay on that loan also is deductible. People typically use these loans to fund college, weddings and home improvements. The amount of money you you’ll save depends on the amount borrowed, but as an example, if you take out a four-year, $20,000 HELOC at 4 percent interest, you’ll have an $800 deductible that will save you about $205 in the first year of your loan. Joint-filing taxpayers could deduct up to $100,000 ($50,000 for individuals) in interest paid on home equity debt. The new tax law eliminates this tax deduction unless that HELOC is used specifically to “buy, build or improve a property,” according to the IRS. That’s bad news for homeowners hoping to pay off college tuition, but still good if your home is in need of a kitchen overhaul or half-bath.
