Over the last few years, the idea of homeownership as a vital part of the “American Dream” has been fading. However, even so, it’s worth noting that the government still strives to encourage consumers to purchase homes. For those who own homes, there are tax benefits waiting.
Tax deductions available for homeownership
For the most part, tax benefits related to homeownership come in the form of deductions. Here are some of the deductions you can usually take for your home, as long as you itemize:
Mortgage interest: The amount of money you pay in mortgage interest is usually tax-deductible, up to a certain amount. Pay attention to the documents you receive from your lender at the end of the year to see how much is tax-deductible. The amount of interest paid will be on Form 1098.
Property taxes: A portion of your property tax bill is also tax-deductible. Again, this amount can be found on Form 1098.
Points paid: If you paid points to lower your interest rate, you can usually deduct the amount paid, as part of mortgage interest. This often applies to points paid during refinancing.
HELOC/Home equity loan interest: In many cases, the interest you pay on a second mortgage or home equity line of credit is tax-deductible.
Realize that there are restrictions related to the size of the mortgage, as well as to your income, and there are phaseouts for taking these deductions. Check with a tax professional before proceeding, just to make sure that you are eligible.
Tax credits for home improvement
In general, making home improvements isn’t going to provide you with a tax benefit. Unless you deduct the interest you pay on a home improvement home equity loan, you aren’t going to get a tax benefit from this aspect of homeownership. The exception is when your home improvements are related to certain green energy upgrades.
There are still tax credits available for those who install solar energy systems, as well as other green energy systems, such as wind and geothermal. A tax credit is more valuable than a tax deduction, since it’s a dollar for dollar reduction in what you owe. (A tax deduction simply reduces your taxable income.) If you’ve been planning on upgrading your home’s energy system, you can get a great tax benefit. Just make sure you install your system before the tax credits expire.
Owning a home isn’t just about the potential for increased value down the road and the security associated having your own place. With the right approach, you can also enjoy tax benefits.