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7 Major Homeowner Tax Benefits That Can Save You Money!

Nicki & Karen » November 19, 2018

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The Major Tax Benefits of Owning a Home

While purchasing a Southern California luxury home is among the largest financial decisions that you will ever have to make, being a homeowner can be an exciting time in your life that’s filled with possibilities!

As a homeowner, you’ll have greater privacy on your property and will be able to build a strong and stable credit history. Building your own Southern California luxury home or purchasing a home will likely prove to be a fantastic investment in the current market since homes typically increase in value (especially in Southern California). This increase in value could eventually provide you with a substantial return on investment if ever you sell your home in the future. The costs associated with purchasing a home are also much more predictable than the costs attributed to renting. With the home of your dreams in hand, you’ll be able to style the property after your personal preferences, which should give you a sense of pride and fulfillment.

Buying a home will also give you a wide range of tax benefits that you can claim on your yearly tax returns, which extend from substantial deductibles to tax credits. The following is a detailed look at seven of the more major and appealing tax benefits that will save you money as a new homeowner.

1. Homeowners Rental Income is Not Taxed!

While this benefit is somewhat of a hidden one, homeowners automatically receive rental income upon purchase of a home, which is never taxed. When you purchase a home, you’re making an investment into your property. A portion of the returns on investment that you receive include the fact that you’re able to live in your home without needing to pay rent every month.

Rental income refers to the amount of money you would receive when renting your home at market rates. When it comes to rental homes and apartments, landlords must pay taxes on the rental income they receive from tenants, while the tenant is unable to use their rental payments as tax deductions. Homeowners are essentially both tenant and landlord but are not expected to pay taxes on their rental income.

2. Deducting Your Mortgage Interest

If you tend to itemize deductions on your tax forms, you receive numerous benefits from being a homeowner. When itemizing your deductions, you’ll be able to reduce the amount of your income that’s taxable by deducting any of the interest that you’ve paid on your mortgage. The limit for this deduction is set to the interest that you’ve paid on a mortgage of up to $1 million. Any taxpayer who does not currently own a home is unable to deduct the interest they’ve paid on items throughout the year, which puts them at a disadvantage compared to homeowners. This is considered to be the largest tax break that you can obtain as a homeowner, which is why it’s essential that you don’t overlook it.

3. Points Offer a Tax Break

When you’re purchasing a new home, it’s likely that you will be tasked with paying mortgage points to the lending company in order to receive a lower interest rate. A single point equates to one percent of the purchasing price of your new home. These fees are provided to the lender at closing. If you’re purchasing a home that’s priced at $300,000 and decide to pay two points, this would equate to $6,000.

In turn, your APR could lower from something like 4.5 percent to 4.0 percent, which would provide you with a relatively substantial amount of savings on your monthly payments. You can deduct the points on your tax return as long as the down payment you make at closing equals the total number of points that you paid on your initial mortgage. Though somewhat unlikely, it’s also possible to convince the seller of the home to pay for the points as part of the closing deal, which you would still be able to deduct on your tax return.

4. Tax-Free Profit from Home Sales

While this major benefits of owning a home won’t be felt immediately upon purchase, it’s something that can be extremely useful in the future. If ever you decide to sell your home, any profits that you make from the sale of your house are completely tax free. Once your real estate agent obtains their fee and any money left on your mortgage loan is paid back, you can keep all of the leftover profits without paying even a dime in taxes. However, there are several conditions that you must meet if you want this profit to be 100 percent tax-free. In the event that you are single and have lived within the home for two out of five years that you’ve owned the property, as much as $250,000 of your profit from the sale can be kept without paying taxes on it.

For married couples who file jointly, as much as $500,000 of profit is exempt from taxes. Unless you own a high-end luxury home and have paid off most of your mortgage, it’s likely that you won’t need to pay any taxes on the profits you’ve received from the sale of the house. Keep in mind that this tax break can be used more than once for your main home as long as you haven’t used the tax break in the past two years. There are also some exceptions to the rule that you will need to have lived in the home for two out of every five years that you owned it. Changes in health or employment that caused you to sell the home earlier than expected may allow you to qualify for a partial exclusion, which means that half of the aforementioned profit amounts would be tax-free.

5. Property Tax Deduction

One of the major deductions that you can make on your tax returns after purchasing a home is a deduction on your property taxes. Most of the monthly loan payments that you make as a homeowner are taxes that go directly into an escrow account. Once inside the escrow account, a payment of the taxes will be made once every year. The lender that provided you with your mortgage loan should give you a statement every year that details the amount of property taxes that you paid each month. You can then use this amount as a deduction on your yearly tax return. Make sure that you don’t attempt to deduct the monthly payments that were placed into escrow on your tax forms. It’s essential that you deduct only the amount that was paid from the escrow account at the end of the year. There’s a federal limit on the amount of local and state taxes that you can deduct each year, which is currently set to $10,000.

6. Energy-Saving Credits

Energy-saving credits can be beneficial in a variety of ways, the primary of which is that you’ll receive more money. However, the energy improvements that you’ll make to your home in order to receive these benefits should also bolster the value of your home while allowing you to make small changes that benefit the environment. There are a variety of improvements that you can make to your home in order to earn these credits, all of which are designed to make your home more energy-efficient. The tax credits that you can claim on your returns each year amount to a total of $500. While tax deductibles only reduce the amount of your income that’s taxable, tax credits will directly reduce your tax bill. If you receive $300 in tax credits and owe $1,200 on yearly taxes, the tax credits will lower your tax bill to $900.

The changes that allow you to qualify for these credits include the replacement of non-efficient appliances with ones that are considered to be energy efficient, which includes central air conditioners, furnaces, water boilers, insulation systems and windows. You can receive credits that equal up to 10 percent of the cost of these systems. More expensive energy-efficient units like water heaters and solar-powered generators will allow you to obtain tax credits of up to 30 percent of the system cost. When purchasing one of the more expensive systems, there’s no limit to the tax credit that you can receive.

7. Utilizing Home Equity Loans

The final benefit on this list is available when you utilize a home equity loan, which is a type of second mortgage that you can take out on your home. These loans provide you with the means of borrowing money against the overall value of your home, which is only possible when the value of your home is higher than the amount of money you still owe on your initial loan. In a similar manner as the mortgage interest mentioned previously, you can also use a deduction for the amount of interest you pay on this home equity loan. You will be able to make higher deductions from the accrued interest if you use the money from the loan to make substantial improvements to the quality of your home, which could mean anything from remodeling your kitchen to adding an entire room. These loans typically come with low interest rates and are easy to qualify for.

When you’re a new homeowner, you’re likely searching for ways to save money that will make purchasing a home worthwhile. By tapping into the benefits and tax breaks that are only available for homeowners, you should be able to lower how much you pay in taxes each year, which will net you more money on your tax refund. The savings that you earn can be more effectively put towards savings accounts, future vacations, or anything else that you enjoy in life! Contact Nicki & Karen Southern California Real Estate today if you would like assistance navigating the home buying process!

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