Buying a home is a big undertaking, but did you know that your new home purchase might help you enjoy a world of tax breaks? If you’re a new homeowner, you should know that there are several tax deductions available, some of which can put a fair amount of money back in your pocket. Here are a few tax benefits of homeownership that can really add up.
The mortgage interest deduction
The tax bill makes numerous notable changes to the mortgage interest deduction provision of the tax code in 2018 and going forward.
Beginning in 2018, you can deduct mortgage interest on qualifying residences—those being primary and vacation homes—with total mortgage amounts up to $750,000 for joint filers, and only $375,000 if married and filing separately. However, if you’re a new homeowner purchasing an expensive home, you won’t be able to deduct your full interest amount. If the loan for your home closed before December 15, 2017, you’re grandfathered in under the old limits, which is $1 million for joint filers, and $500,000 if married and filing separately.
The property tax deduction
The average American household pays a little more than $2,000 a year in property taxes. But in some states that figure can be considerably higher. There’s an upside to paying high property taxes though, and it’s the ability to take a larger deduction on your federal income taxes. In 2018 and going forward, your state, local, and real estate taxes are put into one pool for deductibility purposes. Between the three of them, you only can deduct up to a limit of $10,000 total.
The points deduction
Some borrowers pay points on their mortgage in exchange for a reduced interest rate. Points are essentially an up-front fee you give your lender when you sign your mortgage. One point on a mortgage is equal to 1% of your loan value, so if you take out a $200,000 mortgage and pay one point, you’ll spend an extra $2,000. The good thing about points is that they can work as a tax deduction—if not right away, then over time. If the points you pay are in line with the industry standard, and the purpose of your mortgage is to purchase your primary home, then you’re allowed to take a full points deduction right away. Otherwise, you can still take the deduction, but you’ll need to spread it out over the life of your home loan.
The home office deduction
If you’re a freelancer or self-employed and work from home, the home office deduction could save you some money on your taxes. The IRS permits you to write off a portion of the expenses, such as electricity, water, and internet service, which are part and parcel to conducting business from home. To calculate the home office deduction, you’ll need to calculate how much you spend in total each year and see what percentage of your living space your office takes up. So, if you spend $3,000 on eligible expenses and your office takes up 100 square feet in your 2,000-square-foot home, you can deduct $150. To qualify for this deduction, your home office needs to be a dedicated space reserved for business use only. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may still qualify for the home office deduction. While it’s unlikely the IRS will ever come to confirm your claim, it’s still possible—so be honest. A home office can be a flag for an audit.
Do remember, however, to be eligible for these deductions, you’ll need to itemize rather than taking the standard deduction. But if your tax-deductible costs of homeownership are high enough, it’s worth it to take the extra time and effort to itemize rather than just accepting the standard deduction.