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Major Tax Benefits You Should Know as A Homeowner

Buying a home is expensive but at least there are some tax benefits you may be able to get as a homeowner. The benefits you can get start from the time you buy the property right on through to when you decide to sell.

1. Mortgage Interest

When you itemize your deductions, you can deduct the full amount or partial amount of the mortgage interest. If you purchased the home before December 15th, 2017, you may be able to deduct the mortgage interest paid on up to $1 million of loans. If you purchased the home after December 15th, 2017, you can only deduct the interest pay on up to the first $750,000 of loan. The $750,000 loan limit is scheduled to end in 2025. $1 million limit will return after that. The numbers mentioned are for single filers or married filers who file jointly. For married filers who file separately, the deduction is the half.

You can even deduct the interest paid on a private loan as long as the loan is used to purchase, build or improve your primary home.

2. Points

In some cases, you pay points or discount points to the lenders in exchange for a better interest rate. The Internal Revenue Service (IRS) allows you to deduct the full amount of your points in the year you pay them.

You can also deduct points paid on the refinanced mortgage but only over the life of the loan, not all at once.

3. Private Mortgage Insurance

The Federal deduction for private mortgage insurance (PMI) was eliminated by Congress in 2017 but it was back in 2020. It is still uncertain if the deduction will be extended in future years.

PMI is generally required when you have less than 20% equity in your property. For some high income earners, the PMI deduction may be not applicable. If you adjusted gross income (AGI) exceeds $100,000, the PMI deduction begins to phase out. When your AGI exceeds $109,000 (or $54,500 if you married filing separately), your PMI deduction will disappear.

4. Real Estate Tax

As a homeowner, one additional tax you are facing is the real estate tax or property tax. The good news is that you can deduct the state and local property tax in the year you pay them. After the tax reform in 2018, you are only allowed to deduct up to $10,000 (or $50,000 if married filing separately) of State and Local Tax (SALT) per year. With the limitations, you may not be able to deduct the real estate tax anymore on the Federal tax return but it can still be claimed on your state tax return.

5. Credits for Energy Efficiency Improvements

You will be rewarded a tax credit if you install certain energy-efficient equipment in your home. The cost that are qualified for the credits are the followings:

  • Qualified solar electric property costs
  • Qualified solar water heating property costs
  • Qualified small wind energy property costs
  • Qualified geothermal heat pump property costs

The credits depend on when you place the items in service. If you place it in service in 2021, the credit is generally 22% of the costs. The credit for fuel cell equipment is limited to $500 for each one-half kilowatt of capacity.

6. Capital gains when you sell

For married couple who file jointly, there is an up to $500,000 exclusions for capital gains from the home sale if the home is used for primary residence at least for 2 years in the past 5 years. For single filer or married but filing separately filers, the exclusion is up to $250,000 each.

It is not easy to buy a home. If you are interested to become a homeowner and get the potential tax breaks, Redfin provides some tips on how to save for the downpayment.

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