Despite recent tax law changes, there still is no place like home from a tax perspective. Following are five key tax breaks associated with home ownership.
- Sale of principal residence: As long as you meet certain requirements, you can exclude from federal income tax up to $250,000 of gain for single filers and $500,000 for joint filers. To qualify for this tax break—one of the biggest on the books—you must have owned and used the home as your principal residence for at least two of the five years prior to the sale. If you fall short, you still may qualify for a partial exclusion if you move due to a change in employment, health reasons or other unforeseen circumstances.
- Mortgage interest: This remains a big-ticket item for many homeowners who itemize deductions. Under the Tax Cuts and Jobs Act (TCJA), you can deduct interest paid on the first $750,000 of acquisition debt ($1 million for pre-December 16, 2017 loans), but the deduction for home equity debt, previously limited to interest on $100,000 of debt, is suspended for 2018 through 2025. Note: If you take out a home equity loan and use the money for a home improvement (such as finishing a basement or building a deck), it may qualify as an acquisition debt. Thus, the interest is deductible up to the allowable limit.
- Property taxes: The TCJA has watered down this itemized tax deduction, but it still packs some punch. Previously, you could generally write off the full amount of property taxes paid on a principal residence. However, the TCJA limits the annual deduction for state and local tax (SALT) payments, including property taxes, to $10,000 for 2018 through 2025. Nevertheless, this may provide a valuable tax benefit, especially for taxpayers who otherwise have relatively low SALT obligations (e.g., those residing in states with no or a low state income tax).
- Home office deductions: Do you run a business out of your home? Frequently, a self-employed individual who uses part of the home for business—say, a bedroom or attic—will qualify for home office deductions. This tax break is available only if you use the home office regularly and exclusively as your principal place of business or a place where you meet or deal with clients, patients or customers in the normal course of business. If you qualify, you may write off a portion of household expenses like utilities, insurance and repairs, plus expenses directly attributable to the home office.
- Mortgage insurance premiums: Finally, due to recent tax extender legislation, you can deduct the mortgage insurance premiums paid in 2020. However, the deduction for mortgage insurance premiums begins to phase out if your adjusted gross income (AGI) exceeds $100,000 and ends when your AGI hits $109,000. Note: Although this tax break expires after 2020, Congress could extend it again.
This is only a brief overview. You may be entitled to various other tax breaks for home ownership. Factor these tax aspects into your home-buying and home-selling decisions. Contact your JMF tax professional if you need any assistance.