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tax credits for homeowners

If You’re a New Homeowner Don’t Forget to Utilize These Homeowners Tax Credit Programs

Becoming a homeowner can be expensive, and property taxes add up.

By HOM Editorial Team
April 2020

While doing taxes isn’t a fun activity for most, deductions can certainly be a valuable part of the process. In addition to the pool of benefits that come with homeownership, such as freedom, stability, and building equity, there are also tax benefits. In 2020, homeowners’ tax credits include mortgage interest deduction, local and state tax credit, and capital appreciation from the qualified sale of your home.

Becoming a homeowner is one of the largest decisions and investments one can make in their life; becoming knowledgeable about the homeowners’ tax credit and tax benefits is crucial in saving you money and being as financially responsible as possible. After taking the plunge into homeownership, take into account these three homeowners’ tax credits that can help you comfortably glide into financial security.

1. Mortgage Interest Deduction

As a homeowner, you can deduct the interest you paid on your home mortgage. Seeing as the average 30-year fixed mortgage rate is 4.072%, and can range up to 8.75% for a 15-year fixed mortgage, these rates can take a toll on your savings account. There are dozens of factors to consider when receiving your mortgage rate, ultimately making it a confusing process. As the president of ArcLoan, Joseph Kelly, explains, “They fluctuate based upon many factors inside the United States and worldwide. Secondly, mortgage rates vary based upon ‘cost.’ On any given day, there are a variety of interest rates available where the borrower may get a lower rate by paying the additional cost or higher rates, which can even include a lender credit to the borrower.”

Kelly continues to share that you are often able to choose between a lower mortgage rate with closing costs, or a higher rate with no closing costs. For example, if you are taking out a 30-year mortgage for $200,000 with $4,000 in closing costs and opt for a 3.5% rate with no closing costs, “…the lender is giving the borrower a ‘credit’ for the closing costs. Is it worth paying approximately $4,000 to save an additional $69 per month in this example? That depends on how long you expect to be in the property and what you expect interest rates do in the next few years.”

Taking all these factors into account isn’t always easy, but with the right resources, you can make the best decision for you and your future.

Once you have chosen the right mortgage, you can take advantage of the interest deduction, along with the estimated 13.8 million homeowners in the previous tax year. There are new rules put into place by the Tax Cuts and Jobs Act (TCJA), which passed in the winter of 2017 and will be in effect until 2025. The number one change that occurred was announcing a new cap on the amount of mortgage debt you can bear before your interest isn’t fully deductible. Previously, you could deduct mortgage interest on loans up to $1 million and now you can only deduct interest on loans at a maximum of $750,000. In other words, if you bought a home that called for a mortgage exceeding $750,000, you won’t be able to deduct the full amount of interest paid. Another change enacted is that mortgage interest is no longer deductible on a second home under any circumstances, even if you are under the $750,000 limit on your main home. While this will possibly make it more challenging for families looking to purchase vacation homes, they may be able to cushion those extra payments by renting out their additional home for a portion of the year. If you rent your second home out for less than 2 weeks during the year, you can even take the rental income tax-free, no matter how much you’re charging your guests.

Having the ability to deduct your mortgage interest is one of the most appreciated benefits of homeownership, especially because taxpayers who aren’t homeowners have no comparable option to deduct the interest they paid on debt acquired to purchase goods and/or services.

2. Local and State Tax Credit

 With homeownership comes property taxes. Homeowners can potentially deduct their property taxes on a local and state level. Those who itemize deductions can deduct state and local real estate and personal property taxes, as well as either income taxes or general sales taxes.” The TCJA now limits the total local and state tax deduction to $10,000, or $5,000 if married filing separately. The idea behind this property tax credit is that by transferring federal funds to the local or state municipality, local jurisdictions will have the ability to raise and impose new taxes without it being a fiscal hardship to its community.

There are two types of property taxes, so it’s important to understand what category your property, or properties, fall into. There are property taxes for real property and for personal property. Real property taxes, often just referred to as property taxes, applies to property that cannot be moved, including land and anything that is permanently attached to it. Property such as homes, barns, and garages fall into this division. These property taxes are either paid directly to your local tax auditor annually or calculated into your monthly mortgage payment. To determine your real property taxes, you multiply the value of your home by your local tax rate. If the number you’re seeing seems much too high to you — don’t just sigh and ignore it. You can file an appeal with your local tax office if your home is valued higher than you believe it should be.

As for personal property taxes, they are imposed on property that can be moved, such as cars, RVs, boats, planes, and mobile homes. Taxes on these properties are typically paid each year when you renew your registration and some states (about half) in the U.S. charge a personal property tax. If you happen to live in a state which does, it is based on the current value of the said property. There are a variety of ways to lower your property tax bill, such as visiting your local tax office to inquire about property tax appeals, reviewing your property tax card, and of course, tax breaks.

While paying property taxes can be a huge burden for homeowners, you can rest easy knowing that not only will you be deducting that when you file your taxes, but you’ll also be directly helping your community afford new projects and services that benefit everyone — including you.

3. Capital Appreciation

Last but certainly not least, homeowners can receive a tax benefit from the sale of a property. Within the last five years, if you’ve lived in your home for two of those, you don’t have to pay any tax on the profit of the sale as long as it is below $250,000 for single people or $500,000 for married couples.

While any home improvements made to enhance your property, such as updated appliances, a basement renovation, or a new roof, can’t be deducted, they can be used to help improve the value of your home and in turn the price you sell it for. If you’ve been dying to have a shiny new kitchen drenched in marble, keep in mind it is essentially a win-win in the end. In addition, these enhancements can allow you to increase your cost basis, which would eliminate some (or all, depending on the price of your home) profit you have to claim if you can prove you spent a certain amount in qualified home advancements over time, so be sure to hang onto any receipts for your home improvements. As Steven Weil, an agent and president at RMS Accounting, says, “When your cost basis is higher, your exposure to the capital gains tax is lower. Remodels, expansions, new windows, landscaping, fences, new driveways, air conditioning installs — they’re all examples of things that can cut your capital gains tax.”

Your cost basis includes the price you agreed to pay for your property as well as some settlement costs such as title fees, legal fees, recording fees, survey fees, and any stamp or transfer taxes paid. Ideally, your cost basis will include as many of your expenses related to your property as possible because it will lower your tax liability in the future.

If you’re looking to avoid capital gains tax on the sale of your home, there are a few ways to do so. Considering you must live in the house you’re selling for at least 2 out of 5 years, it’s a bit of a hurdle for house-flippers. Christopher O’Neal, a public accountant at Nealson Group in Florida, shares, “The two years don’t need to be consecutive, but house-flippers should beware.” O’Neal continues to explain that if you sell a home in less than a year it can get pricey as you could be subject to the short-term capital gains tax, which is substantially higher than long-term capital gains tax. Lastly, if you sold your house due to work, health or “an unforeseeable event, ” the IRS may give you an exception.

Homeownership is the American dream and the financial weight doesn’t need to steer you away. It’s important to keep in mind that owning a home is a huge investment. Not only are you building equity, but with these tax credit programs, you’re saving money in the end. By renting instead, you’re tossing money away and eliminating a heap of tax breaks, so say goodbye to your landlord and hello to your new welcome mat.


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