When it comes to buying a home, reaping the tax benefits is a bonus. But, experts warn, tax benefits for homeowners and homebuyers shouldn't be the sole reason to commit to a mortgage.
"To look at buying a home as a tax gain shouldn't be your main goal," says Laurie W. Ziegler, an enrolled agent based in Saukville, Wisconsin. "But if you are going to be buying a home, you certainly should be considering what tax benefits you could get from that."
Something important for homebuyers (and all taxpayers) to note is that President Donald Trump's tax reform, which takes effect for taxes filed in 2019, increased the standard deduction to $12,000 for single filers and $24,000 for married taxpayers who file taxes jointly. The standard deduction is the amount by which you can reduce your taxable income, no questions asked. Those who don't take the standard deduction can itemize their tax return, meaning they list the tax deductions for which they qualify, including homeowner deductions, to score a more favorable tax bill.
Whether you take the standard deduction or itemize will impact which homebuyer tax benefits you should expect to utilize. And because the standard deduction increases under the new tax law, taxpayers who previously itemized their returns may not find it necessary to do so this year. "From the metrics, we're running over here, it appears that about up to 90 percent of our clients who have traditionally itemized will be better claiming the standard deduction," says John R. Dundon II, a Denver-based enrolled agent, president of Taxpayer Advocacy Services and fellow at the National Tax Practice Institute.
Here's what to know about the tax benefits of buying and owning a home.
State and local property tax deductions benefit those who itemize – with new limits. For homebuyers, the biggest change to the tax code is how taxpayers will (or won't) deduct real estate taxes, says Morris Armstrong, an enrolled agent in Cheshire, Connecticut.
Here's how: Previously, eligible filers who itemized could claim deductions for an unlimited amount of state and local income, sales and property taxes – although they had to choose between deducting income or sales tax. Tax reform adjusts the law, limiting deductions for these personal taxes, which are commonly called "SALT" taxes, to a total of $10,000. This change will hit those with high property tax bills hardest. And going forward, that may impact how people view purchasing homes with heavy tax burdens, experts say. "The homes which may really still appeal to people will be some of the smaller homes where property taxes, plus state and local taxes, will still fall comfortably in the $10,000 number," Armstrong says.
Some states, such as California and New York, are aiming to offer workaround solutions in an effort to maintain a version of these benefits for local residents, Dundon says. So it may be worth working with a local tax preparer to help you identify what, if any, options are available at the local level.
You can deduct up to a certain amount of mortgage interest. For taxpayers who itemize, the mortgage interest deduction allows them to write off interest on up to a set amount of home debt, which can include a home equity loan or line of credit used to purchase or improve their home. For filers for whom this deduction is available, it can reduce their tax liability and their tax bill.
"It either has to be for the purchase of the home, or the proceeds need to be used for the improvement of the home," Ziegler says.
Previously published in U.S. News & World Report