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Income Tax Implications of Home Ownership
Owning a home can provide financial and income tax benefits as well as emotional satisfaction. While a home is usually viewed as shelter and a place to live, over the past few decades many homeowners have seen the value of their homes rise significantly and have reaped the gains when they sold their homes. Since most homeowners use mortgages to finance a portion of the cost of the home, the gains were leveraged even more. But, it’s important to remember that home values do not always rise.
Income tax benefits
The income tax code provides special breaks for homeowners. These breaks are in the form of tax deductions for mortgage interest and property taxes and preferential treatment of gains when the home is sold. As always, you may want to consult with your tax advisor to get a complete understanding of how tax laws may apply to your situation.
In 2018, the Tax Cuts and Jobs Act significantly changes the rules on how much mortgage interest homeowners can deduct from their taxable income. For mortgages originated after December 15, 2017, homeowners can deduct interest on a maximum of $750,000 of mortgage debt, down from $1 million. The $1 million limit is also available for homeowners who closed on a home purchase before January 1, 2018, provided they purchase the residence by April 1.
In addition, the new law limits tax deductibility of property taxes to just $10,000.
Benefits from deductions
Many taxpayers find that the interest on their mortgage and the annual property taxes they pay are large enough to enable them to itemize their deductions instead of using what is commonly referred to as the "standard deduction." However, beginning in 2018, the deductions for some mortgage interest and state and local taxes are limited. The "standard deduction" for single filers on their 2018 tax returns is $12,000 and $24,000 for joint filers. For many homeowners, the deductions allowed for their interest and property taxes exceed those amounts.
Be sure to keep track of when you pay your property taxes. Some areas have due dates close to the end of the year and you must have paid the tax before December 31st to get the deduction.
Another way some homeowners are able to get additional deductions is through the use of home equity loans. However, changes in the new tax law require that the loan or line of credit proceeds by used for home improvements to qualify for a deduction. Under the previous law a tax deduction was allowed regardless of how the proceeds were used.
Benefits on the sale of your home
The new law leaves in place the capital gains exclusion on home sales, which allows a married couple filing a joint tax return to exclude up to $500,000 of gains on the sale of their home. For single return filers the limit is $250,000. You must have lived in the home as your principle residence for at least two of the five years before the sale. You can claim this benefit every two years. There are some special rules if you do not meet that requirement for job changes or health reasons. Consult your tax advisor for more details.
The tax benefits of home ownership can be significant. Be sure to keep good records about the purchase price and any improvements you make to the home. Pay attention to when you make property tax and mortgage payments to ensure they fall into the year you want to take them as itemized deductions. Finally, if you have special circumstances (including a potential large gain if selling your home), be sure to get expert advice to make sure you get the maximum benefits you are allowed under the tax laws.