Owning property is a valuable asset—are you taking advantage of all the financial benefits available to homeowners?
Whether you’re a real estate investor, first-time home-buyer, or experienced homeowner, purchasing and owning a house offers numerous financial benefits. One way to take advantage of this is by claiming the many deductions offered to homeowners. You can do this by itemizing all your expenses and claiming the individual tax credits instead of simply accepting the standard deduction.
Available Tax Deductions for Homeowners:
- Mortgage Interest
- Mortgage Insurance
- Discount Points
- Property Taxes
- Necessary Home Improvements
- Home Office Expenses
- Home Equity Loan Interest
- Capital Gains
What’s the difference between standard & itemized deductions?
Both standard and itemized tax deductions can lower your overall income tax burden by reducing your taxable income a certain amount. The “standard” deduction is the estimated credit the Internal Revenue Service (IRS) believes the average tax filer is eligible for that year. Everyone is eligible for this credit, even if their actual circumstances differ.
However, “itemized” deductions are tax credits based on your actual expenses for the year and the many tax credits for homeowners. Filing your taxes this way means you won’t get the estimated standard deduction, but rather an actual deduction based on your exact expenses.
If you are considering taking advantage of all the tax deductions available to homeowners, you’ll need to file with itemized deductions opposed to the standard deduction. Luckily, you can compare both methods to see which offers the biggest relief before you officially file your taxes!
Here are the eight biggest tax breaks for homeowners in Houston:
1. Mortgage Interest Deduction
Do you have a home mortgage? If yes, you’re eligible for the mortgage interest deduction and can claim a tax credit based on your total mortgage interest payments for the year. Under the Tax Cuts and Jobs Act, homeowners can claim a tax credit up to $750,000 as a single filer or married couple filing jointly. If you are married but filing separately, the limit is $375,000 for each person.
2. Mortgage Insurance Deduction
Private mortgage insurance, or PMI, is another home expense you can deduct from your income tax. PMI is designed to protect your lender if you are unable to continue making payments on your mortgage, but is also a sign of good faith on your part and grants you tax benefits in return.
3. Deducting Mortgage Discount Points
Sometimes, home loan lenders will offer homeowners the option to purchase “discount points”, which can be used to lower the interest rate on your loan. Typically, one discount point is equal to 1% of the total mortgage amount. So, if you purchased discount points to reduce your mortgage’s interest rate, you can deduct their purchase cost from your income tax!
Note: “Loan Origination Points” are not tax deductible because these are fees that don’t affect the actual interest rate of your loan.
4. Property Tax Deduction
As a homeowner, you’re usually responsible for property taxes at both the state and local levels. Luckily, you can claim a tax credit up to $10,000 of your total property tax payments as a married couple filing jointly, or $5,000 total if you’re single or married filing separately. Houston homeowners tend to have lower property taxes, but it’s still worth considering when itemizing your deductions.
5. Deducting Necessary Home Improvements
While the definition of a “necessary” home improvement is limited, there are several renovation tax credits available to homeowners. For example, renovating your home to be more energy efficient or to use “clean” energy could qualify you for the credit. However, choosing to upgrade a perfectly functioning kitchen simply for aesthetic reasons probably won’t.
Another home improvement usually deemed “necessary” but often overlooked is a permanent accessibility aid for medical reasons, like a wheelchair ramp. Most home renovations in this category will qualify you for this homeowner tax deduction.
6. Deducting Home Office Expenses
Do you own and operate a business out of your house? You may be eligible to deduct some of your overhead expenses! However, the IRS requires that your home office be used exclusively for regular business operations to qualify for the deduction. If you only use the office space sometimes or for other things not related to your business operations, you most likely won’t be able to deduct these expenses.
If you are eligible for this homeowner deduction, the size of the credit is based on the overall percentage of your home space dedicated to your business operations.
7. Home Equity Loan Interest Deduction
A home equity loan is essentially a second mortgage on your house, and enables you to access the equity you’ve built in your home as collateral for borrowing funds (typically needed for other purposes).
Unfortunately, the IRS has updated the rules for this deduction so homeowners can claim a tax credit only if the home equity loan was used for home improvements and renovations. If you fall in this category, you can deduct the interest you’ve paid on your home equity loan the same way you would your mortgage interest payments!
8. Capital Gains Deduction
The final big tax break for homeowners comes up when you’re not even a homeowner anymore… Homeowners who sell their home for a profit are eligible for the capital gains tax break. The capital gain, or the profit, is the difference between the value of the home when you bought it and when you sold it. For example, if you bought your home for $100,000 and sold it a few years later for $150,000, you have a capital gain of $50,000.
Typically, capital gains are taxed as part of your income. But, if the home you sold was your primary residence for at least two of the last five years, you could be eligible to keep some of that profit tax-free!
What home expenses are NOT tax deductible?
As you add up your homeowner tax deductions, you may find yourself getting carried away and adding as many home expenses as you can to maximize your tax benefits. However, you should be aware of some common home expenses that are non-deductible, like:
- Natural disaster insurance premiums
- Homeowners insurance premiums
- Payments towards the principal amount of your mortgage
- Domestic service (house cleaners, cooks, pool cleaners, etc.)
- Property value depreciation
- Utility payments (gas, electricity, water, etc.)
- The down payment for your home
Owning property comes with plenty of financial and tax benefits for homeowners. With potentially thousands of dollars in tax deductions on the table, it’s a good idea to add up your tax breaks. Compare the sum of your itemized deductions to the standard deduction before deciding which option is best for your tax return. And, of course, if you have questions or unsure about the deductions you’re eligible for—consult a tax professional!
If you’re in the Houston area looking for a home loan lender, reputable tax professional for homeowners, or any other real estate professional, contact us today and we’ll get you connected to someone you can trust.
Alexis Feezel is a results-oriented Marketing Coordinator responsible for developing, implementing, and overseeing all promotional strategies and activities to effectively market clients & listings and maximize sales.