Benefits of homeownership include very real tax benefits provided by the Internal Revenue Service (IRS). These tax benefits offer tax deductions that reduce a homeowner’s taxable income, thus shrinking their tax obligation.
There are two primary tax benefits available to homeowners, each of which has to do with the costs of obtaining/maintaining a mortgage and the relevant state & local taxes (SALT).
Mortgage Interest Deduction for Homeowners
The interest homeowners pay on their home mortgage allows homeowners to deduct – from their taxable income – the amount of interest paid on the mortgage – if the mortgage meets the definition of a ‘qualified residence loan’ –
- The mortgage was used to purchase, build or improve a primary residence or second home.
- It is secured by the residence and cannot exceed the home’s value.
The Tax Cuts & Jobs Act took effect in 2019. Those filing jointly (or as a single filer) have the opportunity to deduct mortgage interest paid on a qualified mortgage up to $750,000. Couples who choose to file separately have a deduction of up to $375,000.
However, if a home was purchased on or before 12/15/2017, the mortgage interest limit is $1 million for single and joint filers or $500,000 for individuals filing separately.
The interest paid on a collateralized home equity loan or HELOC is also deductible if the loans meet the limits and the loan/line was used to buy, build or improve a primary or secondary home.
However, mortgage interest paid on funds used to pay for tuition or other expenses will not qualify for this deduction. This is also true for cash-out refinance funds.
Mortgage Points Deduction
Another tax benefit available to homeowners is the deduction of the mortgage points paid when closing the home’s purchase. Each discount point equals 1% of the mortgage amount. Most homeowners deduct the mortgage points paid over the life of the loan instead of the year in which the points were paid. However, the Internal Revenue Service offers an exception to this guideline that allows homeowners to fully deduct the points during the year they were paid, as follows –
- The mortgage is secured by a primary residence.
- The points paid were customary to the area and did not replace other closing costs.
The IRS offers a deduction for state and local taxes (SALT), including payment for property taxes. The deduction caps out at $10,000 for married couples (filing jointly) & single taxpayers and married couples. Married couples filing separately have a deduction limit of $5,000. The SALT limits set forth by the IRS does not benefit homeowners in these states, because of high property taxes –
- New Jersey
- New York
Tax-free Profits on your Home’s Sale
Another tax benefit from homeownership is the potential tax-free profit available when selling a home. If a homeowner has lived in the property for a minimum of two of the previous five years before the sale of their primary residence, they can reap profits of up to $250,000 (if single) or up to $500,000 for those filing jointly.