The Tax Benefits of Buying a House

The PropertyClub Team
Aug 24th 2020
If you're thinking of buying a house, you're probably wondering about the benefits that come with being a homeowner. Tax deductions a major perk you'll enjoy when you own a home. Here's what you need to know.

Buying a house is an expensive endeavor, but financially speaking, it’s often the smartest thing to do. In most situations, buying a home is a fiscally sound decision. I mean, if you think about all the perks that come with a home purchase, it’s easy to see the appeal. 

Rents are always on the rise, so even when you are dealing with a pricey house, you’ll end up saving in the long run. Owning a home also gives you the right to rent it out, and you get to build equity with every payment you make on it. It’s the tax benefits that come with being a homeowner that make it worth it for many people. 

With that said, the tax benefits you can get are not always going to be worth the money. Before you decide to plunk down the cash for that beautiful home with a white picket fence, make sure that you’re aware of the tax perks—and if they’re right for you. 

What Are The Biggest Tax Benefits of Owning a Home?

Before we get into the details of the potential tax benefits you can reap if you decide to buy a home instead of rent, let’s start with a general run-through of the most common perks homeowners enjoy:

  • Tax-deductible mortgage interest
  • Tax-deductible property taxes
  • Tax-deductible loan points
  • PMI (Private Mortgage Insurance) tax deductions
  • Home sales tax benefits
  • Energy-efficiency upgrade tax write-offs
  • Aging upgrade expenditure write-offs
  • Home office write-offs

Now that we’ve listed the biggest tax benefits of owning a home, let’s talk about how each of them can give you a hand once tax season arrives. 

Tax-Deductible Mortgage Interest

Most homeowners hate the fact that they have to pay an arm and a leg for their mortgage interest. Mortgage interest makes up a large swath of your monthly bill, but there’s some good news here. You can deduct most of it thanks to the mortgage interest deduction. This is one of the biggest tax benefits of owning a home. 

Though the rules were a little more relaxed back in the day, you can still deduct most (if not all) of your mortgage interest every year. This option is open for houses up to $750,000 in price as well as Home Equity Lines of Credit that are used to make improvements to your home.

State and Local Property Tax Deductions

This seems like a misnomer, but it’s not. If you’ve already paid your state and local property taxes, then you can deduct most of them when federal tax time comes. With these deductions, there’s a limit to how much you can deduct from your taxes.

Due to the Tax Cuts and Jobs Act of 2017, there is a $10,000 limit to how much you can deduct from your current tax bill. Even so, that’s enough for most homeowners to get a sizable deduction once tax time rolls in.

Loan Point Deduction

Loan points are fees that are paid as part of a mortgage loan or a refinance. They are expressed as a percentage of your loan and can easily add up to several thousand dollars. If you refinanced your loan or have a HELOC, then you’re in luck.

You can deduct the amount of money you pay towards points each month. However, this is a deduction best left to tax professionals.

PMI Deductions

Do you pay extra for Private Mortgage Insurance? For many people with less-than-ideal mortgages, PMI is just a part of life. Thankfully, the extra fees you pay have an upside that you can enjoy every April 15.

Much like with property taxes, this has a caveat as well. If you and your spouse earn under $100,000, you can claim your PMI as a deduction. Otherwise, singletons can only claim this deduction if they make under $50,000 a year.

Home Sale Tax Benefits

Even selling your home can come with a considerable tax perk. Due to the home sale exclusion, you don’t have to pay taxes on any of the profits that you get from your home—as long as the gains you get are under $500,000 if you’re married or $250,000 if you’re single. 

So, if you buy a house at $200,000, live in it for seven years, and add a $50,000 upgrade, your full cost is $250,000. If you sell it for $500,000, it’s counted as a $250,000 profit. This write-off is absolutely massive. 

Energy Efficiency Tax Writeoffs

This tax write-off saw a huge heyday in the mid-2000s to the early 2010s, but that doesn’t mean that the party is over. Before 2020, 30 percent of all expenditures made towards creating a more energy-efficient home were tax-deductible. 

For 2020, you get a 26 percent write-off for energy-efficient goods. Next year, the write-off goes down to 22 percent. Though the amount of money you get back is decreasing, it still pays to go green. 

Aging Upgrade Writeoffs

As people age, they tend to lose mobility and begin to rely on devices that help them move around their home. These items cost money, especially when it comes to things like bathroom mobility upgrades, wheelchair ramps, or motorized stair chairs.

If you plan on living in your home as you age, you have some good news as you'll enjoy additional tax write-offs when it comes to the upgrades you need to live there. You might be surprised to find out how many upgrades are considered write-off material under this category.

It’s also worth noting that this tax benefit also holds up for people who have disabilities as well as people who need specialized equipment for medical purposes. So if you need to make your home ADA-accessible, you’re in luck.

Home Office Upgrades

Are you a freelancer, or do you need to have a home office? There’s some good news to be had as a homeowner. Current tax laws allow you to deduct $5 per square foot, for up to 300 feet, for your home office. 

It’s worth noting that the home office deduction is a dicey one to choose. If you don’t do it right, it can set off a red flag for the IRS and trigger an audit. There are incredibly tight regulations on what a home office is allowed to be deemed. 

If you choose to work this option, make sure that you have proof to back it up. This means that you have to have a dedicated room that has office equipment and not much else. With that said, you also get a tax write-off for office furniture, though that’s more of a business expense than anything else.

While renters can also use this deduction, owning your house and having a dedicated home office means you’re less likely to have trouble with the IRS. 

Using Your Retirement To Buy A Home

Many people, particularly retirees, tend to use a 401(k) or Roth IRA to finance a home. However, this option exists for just about anyone who chooses to do so. Though it might be a risky option to pursue, the truth is that it still comes with its fair share of tax perks.

There are limits to how much you can withdraw. With a Roth IRA, you can only withdraw around $10,000 of the money that you put in. With a 401(k), you can withdraw up to 50 percent of the plan that you enrolled into, as long as it’s not more than $50,000. 

If you choose to use your retirement funds to buy a home, you can avoid the 10 percent tax penalty that is usually given to people who decide to withdraw funds before they are over the age of 59 ½. This can help you save around $1000 or more come tax time.

Because withdrawing funds from your account can potentially put your future in jeopardy, we very strongly suggest that you talk to a financial specialist before you choose to do this. 

Rental Expense Deductions

Are you a homeowner who wants to rent out a portion of their home? If you tend to rent through Airbnb or other similar means, you have yet another way to deduct expenses from your home price. 

According to current tax law, you can deduct any expenses that come from renting out your home. Expenses can include fees for advertising, laundering your rented bedsheets, professional cleaning supplies, and installing smart locks for people to use.

These deductions don’t have to be itemized. Instead, they’re on the 1040 Schedule E. Even so, you might want to keep a tab on your expenses to know exactly how much you can deduct. 

Conclusion

It’s clear that buying a house and getting a mortgage is going to be an expensive thing to do. Even so, people do it every single day. There’s a reason why most people agree that owning a house makes more financial sense than renting, and much of that is due to how Uncle Sam treats homeowners come tax time. 

Choosing to buy a home yields tons of benefits, many of which might surprise you when you first decide to become a homeowner. By choosing to research your potential perks, you’re doing yourself a huge favor when it comes time to buy a home.