Of course, purchasing a home can instill pride and give you more space, freedom, and privacy. But did you know that there is also an array of potential tax benefits (Investopedia, 2022) related to homeownership? Whether you’re a current or future owner, understanding the impact of homeownership could be critical this tax season. Here are the six key tax benefits of owning a home as of January 2022:
Mortgage Interest Deduction
The home mortgage interest deduction, or HMID, is a powerful and popular tax benefit touted by real estate professionals and current owners alike. This tax break “allows itemizing homeowners to deduct mortgage interest paid on up to $750,000 worth of their loan principal” (Investopedia, 2021), or $1 million if you bought your home before December 16, 2017 (Investopedia, 2022).
If you’re eligible for this benefit, keep an eye out for a 1098 form (Investopedia, 2022) from your lender. This document will help you determine how much you paid in interest, which can then be entered into your tax return.
Mortgage Points Deduction
Did you pay mortgage points (Investopedia, 2022), or units typically equal to 1% of the total loan amount to your lender last year? If so, you may be eligible for another tax deduction.
You can deduct monthly payment amounts that went toward these points on debts up to $750,000 (Investopedia, 2022). This information will also be included in your 1098 form, and the mortgage points deduction can be claimed on Schedule A of Form 1040 or 1040-SR.
Private Mortgage Insurance (PMI) Deduction
Many borrowers must obtain PMI, which protects the lender in case of default. While this may be seen as another pesky monthly expense, the good news is that you might be able to deduct these payments (Investopedia, 2021) when doing your taxes.
The IRS allows borrowers to treat PMI payments like interest, but eligibility will depend largely on your income. For example, those with an adjusted gross income of $100,000 or less can take the full deduction while those earning more than $109,000 are ineligible.
State and Local Tax (SALT) Deduction
If you itemize on your federal tax return, you may be eligible for yet another deduction. The SALT deduction (Investopedia, 2022) allows taxpayers to deduct up to $10,000 paid in state and local sales taxes.
This information may be on the 1098 form from your lender, but if you pay these taxes directly, you’ll need a copy from your own records. When it comes to the SALT deduction, keep in mind that you can deduct income taxes or state and local sales taxes, not both.
Home Sale Exclusion
In today’s strong seller’s market, the Home Sale Exclusion benefit is being put to good use. This benefit dictates that sellers who have lived in the home for two or more of the five years leading up to the sale do not have to pay taxes on the first $250,000 made in profit, or $500,000 if filing jointly. If you earned more than that, you’ll want to report it on Form 8949 (Investopedia, 2021).
Tax Credits
There are also various tax credits (Internal Revenue Service) associated with energy efficiency, electric vehicle ownership and more. If you received a mortgage credit certificate (Investopedia, 2022), you may also be eligible for additional tax-related savings.
From building equity to benefiting your taxes, homeownership is a powerful financial tool. Keep in mind, though, that the application of these or other benefits may depend on your location, home loan, and personal financial situation. Always consult a professional for tax-related questions, and to ensure you’re getting the most out of your homeownership journey.
Published on February 28, 2022
