With tax season upon us, home owners are reminded about recent changes to the tax code that went into effect in 2018. Despite the changes, it’s important to remember that home owners can still take advantage of many tax incentives.
Home owners who itemize their federal income tax deductions can deduct 100 percent of their mortgage interest payments on a first and second home, up to a maximum mortgage amount of $750,000 for loan balances taken after Dec. 16, 2017. The limit remains $1 million for mortgages that were established prior to this date, as well as for home owners who were under contract before Dec. 15, 2017, subject to certain rules.
Taxpayers can also deduct up to $10,000 of state and local taxes, including property taxes and the choice of income or sales taxes.
Plus, households can take a deduction on a home equity loan or home equity line of credit if the loan is used for substantial home improvements, such as remodeling.
And when they decide to sell their home, many home owners do not have to pay capital gains tax on profits from the sale. Married couples who have owned and occupied their principal residence for at least two of the past five years do not have to pay any taxes on the first $500,000 in profits from the sale of their home. For single filers, the first $250,000 in profits will be tax free.
Mortgage insurance premiums offer another potential deduction for home owners. Generally, people who purchase a home without putting 20 percent down must buy mortgage insurance, and those premiums can also be deducted from taxable income.
Buying and owning a home can offer significant tax savings. Many home owners rely on these benefits to help offset the costs of homeownership, while prospective buyers take them into consideration as an advantage over renting.
It’s important to keep in mind that the tax law did create important changes that could impact individuals and small businesses. You should always consult a qualified professional adviser for questions about filing your tax returns.
Home owners also can review the Internal Revenue Service Publication 936, which helps explain the rules for deducting home mortgage interest. You can access this document at www.irs.gov/pub/irs-pdf/p936.pdf.