Purchasing a home in the United States is more than a milestone of personal achievement. Not only does it give you a reason to rejoice, but it also opens a gateway to significant tax benefits. There are varied tax benefits to owning a home if you know what to search for! These advantages, particularly if you itemize your deductions on your federal tax returns, can lower the cost and increase the financial rewards of owning properties.
Here’s a comprehensive understanding of what are the tax benefits of homeownership in the States. Read on to know how to utilize it to your benefit –
Imputed Rent Tax Benefit
The chance to live in a house rent-free is one of the benefits of purchasing a home. The return on homeownership, or what economists refer to as “imputed rent,” is not included in taxable income the way returns from other investments are. In contrast, renters are not allowed to deduct the amount of rent they pay, and landlords are required to include the rent they receive as income.
Although a homeowner is essentially both a landlord and a renter, the tax code ignores this fact and taxes homeowners the same as renters. The Office of Tax Analysis (OTA) at the US Department of the Treasury predicts that in fiscal year 2022, the absence of imputed rent decreased government income by $128.9 billion.
Property Tax Deduction
The IRS suggests that homeowners can deduct taxes on their primary property or residence. Up to $10,000 of the money spent on specific state and local taxes, such as property, income, and sales tax, can be written off by taxpayers under the state and local tax (SALT) deduction.
However, those who leverage the SALT deduction must choose between income and sales tax, as you cannot deduct both. Since 2018, the annual maximum for all state and local tax deductions, including income and property taxes, has been $10,000.
Who can benefit from SALT deductions? People investing in properties in areas with higher state and local tax rates often see the maximum benefits from the SALT deduction.
Home Office Deductions
The rise of work-from-home culture has made it easier on taxpayers. If you’re still wondering what are the tax benefits of homeownership, read this! If you use a part of your home for an office or business, you have the privilege to deduct expenses related to that particular space in your home. Rent, utilities, insurance, and maintenance expenses, as well as a percentage of your mortgage interest, may fall under this category.
However, it’s important to remember that to qualify for this kind of tax savings, the space must be solely used for business purposes. For remote workers or self-employed individuals, this tax deduction can offer great value.
Home Mortgage Interest Deductions
Another major benefit is mortgage interest deductions. As per the IRS, homeowners have the liberty to deduct their interest amount from the total home loan from their taxable income. However, the amount must be within specific limits. What does this mean? It means that the more interest paid, the larger deductions you’re entitled to.
Homeowners can deduct the interest paid for up to $750,000 of the total debt that they have tied up into a mortgage. As an illustration, let’s say a couple has a $250,000 average mortgage balance and a 4% interest rate. With this deduction alone, they might be able to save about $2,500 in taxes in a given year.
Home Sales Tax Deductible
Generally, in the States, you have to pay capital gains tax on the profit you make on selling properties or assets. However, homeowners can be exempted from an income up to $250,000 of capital gains. It is important to note that homeowners and the sale of their homes must satisfy specific criteria. They typically cannot claim the capital gains exclusion for the sale of another home over the previous two years, and they must have kept the house as their primary residence for two of the five years prior.
Home Improvements and Upgrades
Some of your home improvements, also called capital improvements, offer several benefits to homeowners. These improvements must increase the home value. An example of capital maintenance or improvement could be medical expenses that qualify for deductions. This includes installing entry ramps, wheelchair-accessible areas, widening doorways, etc. There are potential tax benefits of these kinds of improvements.
Among the other improvements to your home are installing smoke detectors, adding railings to bathrooms, or ensuring the right CCTV installations.
Energy Efficiency Tax Credit
For homeowners who upgrade their homes with eligible energy-efficient upgrades, the federal government provides tax incentives. Credits for installing solar panels, heat pumps, insulation, energy-efficient windows, doors, and other renewable energy systems are among them. These allow homeowners to deduct taxes and gain benefits.
With the help of new laws like the Inflation Reduction Act of 2022, you can claim up to 30% of the cost of eligible upgrades under the Energy Efficient Home Improvement Credit. For instance, the credit can reach up to $1,200 per year for the majority of improvements between 2023 and 2032, with different caps for specific equipment, such as heat pumps.
In contrast to deductions, which lower taxable income, these credits immediately lower your tax bill dollar for dollar. They urge homeowners to spend money on energy-saving improvements that lessen their impact on the environment and utility bills.
Enjoy Your Rights As A Homeowner!
The tax benefits of owning a home in the US are huge! It’s more than just a shelter for you. The tax advantages can effectively help reduce your tax liability. However, these tax deductions depend on your individual tax situation. So, when you’re investing in a home, you must connect with an experienced realtor who can help you with excellent property management and navigate the complexities of real estate taxes for you.
FAQs
How Can I Avoid Capital Gain Tax On My House?
For this, you must own and live in the house as your primary residence for at least two of the five years before the sale.
Are HOA Fees Deductible?
No. In most cases, the IRS does not consider HOA (homeowners association) fees to be deductible, as this comes under personal expenses rather than deductible expenses.
Do I Have to Pay Tax on Inheritance?
In most cases, no! However, five US states do enforce a tax on inheritance.
