When it comes to buying a home, reaping the tax benefits is a bonus. But, experts warn, tax benefits for homeowners and homebuyers shouldn’t be the sole reason to commit to a mortgage.
“To look at buying a home as a tax gain shouldn’t be your main goal,” says Laurie W. Ziegler, enrolled agent based in Saukville, Wisconsin. “But if you are going to be buying a home, you certainly should be considering what tax benefits you could get from that.”
Something important for homebuyers (and all taxpayers) to note is that President Donald Trump’s tax reform, which takes effect for taxes filed in 2019, increased the standard deduction to $12,000 for single filers and $24,000 for married taxpayers who file taxes jointly. The standard deduction is the amount by which you can reduce your taxable income, no questions asked. Those who don’t take the standard deduction can itemize their tax return, meaning they list the tax deductions for which they qualify, including homeowner deductions, to score a more favorable tax bill.
Whether you take the standard deduction or itemize will impact which homebuyer tax benefits you should expect to utilize. And because the standard deduction increases under the new tax law, taxpayers who previously itemized their returns may not find it necessary to do so this year. “From the metrics we’re running over here, it appears that about up to 90 percent of our clients who have traditionally itemized will be better claiming the standard deduction,” says John R. Dundon II, a Denver-based enrolled agent, president of Taxpayer Advocacy Services and fellow at the National Tax Practice Institute.
Here’s what to know about the tax benefits of buying and owning a home.
State and local property tax deductions benefit those who itemize — with new limits. For homebuyers, the biggest change to the tax code is how taxpayers will (or won’t) deduct real estate taxes, says Morris Armstrong, an enrolled agent in Cheshire, Connecticut.
Here’s how: Previously, eligible filers who itemized could claim deductions for an unlimited amount of state and local income, sales and property taxes — although they had to choose between deducting income or sales tax. Tax reform adjusts the law, limiting deductions for these personal taxes, which are commonly called “SALT” taxes, to a total of $10,000. This change will hit those with high property tax bills hardest. And going forward, that may impact how people view purchasing homes with heavy tax burdens, experts say. “The homes which may really still appeal to people will be some of the smaller homes where property taxes, plus state and local taxes, will still fall comfortably in the $10,000 number,” Armstrong says.
Some states, such as California and New York, are aiming to offer workaround solutions in an effort to maintain a version of these benefits for local residents, Dundon says. So it may be worth working with a local tax preparer to help you identify what, if any, options are available at the local level.
You can deduct up to a certain amount of mortgage interest. For taxpayers who itemize, the mortgage interest deduction allows them to write off interest on up to a set amount of home debt, which can include a home equity loan or line of credit used to purchase or improve their home. For filers for whom this deduction is available, it can reduce their tax liability and their tax bill.
“It either has to be for the purchase of the home, or the proceeds need to be used for the improvement of the home,” Ziegler says.
Under the tax reform, new homebuyers can deduct the interest on up to $750,000 of mortgage debt if they are married and file jointly. Those who file individually can write off up to $375,000. Previously, filers could deduct interest on up to $1 million of qualified debt or $500,000 if filing separately. Take note that if you purchased a home before the end of 2017, you may still be grandfathered into to being able to use this larger cap.
There are tax-free profits on the sale of the home. This benefit remains under the new tax law, which is a win for homeowners. “That’s a godsend,” Armstrong says. If you lived two years out of the previous five in the home and choose to sell it, up to $250,000 in profit is tax-free for single folks and $500,000 for those married and filing jointly.
Consider a withdrawal from IRAs and Roth IRAs. First-time homebuyers retain the option to withdraw up to $10,000 from an individual retirement account for a down payment on a home. While the funds would be taxable, borrowers would not be required to pay the 10 percent penalty on early withdrawals.
If you use a qualified Roth IRA to fund your first home purchase, you can also withdraw up to $10,000 tax-free and penalty-free since you’ve already been taxed on the amount.
Keep in mind, Armstrong says, that withdrawing from your retirement account to fund a first-time home purchase could have long-lasting effects on your retirement security. “Young people don’t always realize the impact of removing the principal, which can grow for 50 years,” he says.
Most taxpayers won’t be able to deduct moving expenses. Previously, workers who were moving for a new job or relocating could claim unreimbursed moving expenses on taxes. Beginning with 2018 taxes, only qualified members of the military can take advantage of these tax breaks.
Check your state’s tax law. Take note that your state may have its own deductions, credits and federal tax workarounds for homebuyers. Since this year, especially, has so many changes, it may be worth working with a tax professional or taking extra care in preparing your own tax return to ensure that you’re maximizing available benefits. “You want to check with your local tax professional,” Ziegler says. “Just because [a tax benefit] might not apply to you for federal, it might apply in other cases.”
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