home ownership tax savings

The Tax Benefits of Homeownership

April is right around the corner, and Tax Day will be here before we know it. Purchasing a home is a significant financial decision, but one that could have tax benefits built-in. Let’s take a look at some of the tax benefits of homeownership for those who qualify.

Keep in mind that The Tax Cuts and Jobs Act, which was implemented in December 2017, changed and limited some of the tax benefits available to homeowners

This provided an increase in the standard deduction, but also created limitations on itemized deductions. Start by finding a financial advisor who can help you determine which tax deductions might work best in your favor.

Homeowners may be entitled to the following tax deductions, and we will explore each in more detail: 

  • Mortgage interest deduction.
  • State and local tax deduction
  • Tax-free profits on qualified home sales up to $500,000
  • Penalty-free IRA withdrawals


Mortgage Interest Deduction

To use the mortgage interest deduction, you will have to itemize your return on your Schedule A. If you’re taking the standard deduction, you will not qualify for the mortgage interest deduction

For taxpayers who are itemizing, they can deduct home mortgage interest on the first $750,000 of debt ($375,000 if married and filing separately). If you purchased your home before Dec. 16, 2017, you can still use the higher limitations from that year: $1 million ($500,000 if married and filing separately)

The rules have also changed for home equity lines of credit, where you can now only deduct interest on up to $100,000 if you use the funds to build or improve your property. The new law also states that this amount will apply toward your maximum deduction (versus being in addition to the limits above). 

State and Local Tax Deduction

Did you know that certain state and local taxes that are based on the value of your property are deductible on your federal tax return? Filers are limited to deducting up to $10,000 in state and local taxes ($5,000 if married filing separately). Again, this is a situation where you would need to itemize your return versus taking the standard deduction.

Tax-Free Profits on Qualified Home Sales

This is one tax benefit that is mostly unchanged for homeowners under tax reform. If a homeowner has lived in their home for two of the previous five years, they can collect tax-free profits on the sale of their home up to $500,000 for married couples ($250,000 if filing single).

A tax professional can assist you with this benefit because there are some exceptions. For instance, if you fail to meet the timeline requirement but are being forced to relocate because of a job change, you may be able to claim a prorated portion of your earnings tax-free.

Penalty-Free IRA Withdrawals

If you are a first-time homebuyer, you can withdraw up to $10,000 from an IRA to assist with your down payment, and you will not be charged the 10% penalty. The withdrawal must come from a Roth IRA (which has already been taxed), and certain limitations apply like needing to have owned the account for at least five years. 

Again, a tax professional or financial advisor can give you the most sound guidance when it comes to the tax benefits of homeownership. But the above-mentioned options would be a great way to get the conversation started.  

Of course, if you have any escrow-related questions, please contact us. It would be our pleasure to assist you!