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Home Ownership and Tax Deduction

Updated: Apr 1, 2019

A common question we receive is whether or not there are tax deductions available through owning a home.  However, before listing some of the tax benefits, it’s important to first explain what a tax deduction is.  A tax deduction decreases your taxable income, which, in turn, decreases the amount of tax you owe the federal government.  For example, if you made $80,000 in taxable income, a $10,000 tax deduction would reduce your taxable income to $70,000 ($80,000 - $10,000 = $70,000).  If you were in the 22% tax bracket, a $10,000 tax deduction would result in a $2,200 tax savings ($10,000 * 0.22 = $2,200).  Now, to answer the original question, home ownership can provide some significant tax benefits.  Here are a few of the tax deductions that may be available: 

Mortgage Interest Deduction.  Under the new tax laws that went into effect on January 1, 2018, if you are single or married filing jointly the interest paid each year on your mortgage may be tax deductible up to $750,000 in mortgage debt incurred to purchase or improve a primary residence or second home.

Note: The new tax code also includes a “grandfather” rule which allows a homeowner to deduct interest up to the previous loan limit of $1 Million for mortgage debt incurred to purchase or improve a primary residence or second home if it meets one of the following:

Debt was incurred before 12/16/2017 or the binding contract to purchase a home was in effect before 12/16/2017 and the home purchase closed before 4/1/2018.

Another “grandfather” rule includes a provision that allows for a new refinance of home acquisition debt that was taken out prior to 12/16/2017, as long as the principal balance of the new loan does not exceed the balance of the loan they are refinancing.

Purchase Costs Deduction.  Loan discount points and origination fees may be tax deductible.  In addition, any "daily interest" paid on the mortgage at closing may also be deductible.  We’ll provide you with your final closing statement after close of escrow.

Property Tax Deduction.  Real estate taxes may be deductible up to a certain $$ amount based on what other state and/or local taxes you pay. Under the new tax law that went into effect on January 1, 2018, the maximum deduction for personal state and local taxes (which include real estate taxes) is generally $10,000.

Capital Gains Exclusion.  Married taxpayers who file jointly may be able to keep (tax free) up to $500,000 in profit on the sale of a home used as a principal residence two out of the prior five years.  Single and married filing separately may be able to keep up to $250,000 each, tax free.

Home Improvement Loan Interest Deduction.  If you take out a loan on a primary or secondary residence for any significant home improvements, you may be able to deduct the interest up to the maximum allowable limits.  Check with and a tax professional for the improvements that qualify.

Home Equity Loan Interest Deduction.  The interest you pay on a home equity loan or line of credit for a primary residence or second home (if used for acquisition or improvement costs) may be deductible up to the applicable limits based on when the property was acquired.

While the items listed above are some of the larger tax deductions that come with home ownership, additional tax benefits may exist.  It’s important that you also review all tax matters with a tax professional.  If you have any questions, please feel free to call or email us.

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