What Are the Tax Benefits of Homeownership?
Purchasing a home is one of the biggest investments that a person can make. Fortunately, there are many potential tax benefits for homeowners, including tax deductions, credit opportunities, and other incentives. The major tax breaks that individuals can take advantage of are:
- Mortgage interest deduction
- Property tax deduction
- Exclusions of gains from taxable income when selling the property
- No penalty for first-time homebuyers to take an early withdrawal from an IRA to fund a property purchase
- Home office deduction
Home Mortgage Interest Deduction
Qualified residence interest is that interest which is paid or accrued during the tax year on “home acquisition debt” used to purchase, build, or improve a qualified residence and that is secured by the residence (however, the debt cannot exceed $1 million/$500,000 married filing jointly). Acquisition debt is debt that is incurred in acquiring, constructing, or improving a residence.
Property Tax Deduction
In general, real property taxes are deductible. Real property taxes are those imposed by a governmental entity (state and/or local) on a property for the benefit of the general public welfare. Property taxes do not include special assessments, and a taxpayer cannot deduct foreign property taxes. The deduction is subject to limitations of up to $10,000 of total taxes.
Exclusion of the Gain on the Sale of a Principal Residence
In general, taxpayers can exclude up to $250,000 ($500,000 for those married filing jointly) of gain on the sale of a principal residence from their gross income. The taxpayer must have both owned and used the property as their principal residence for an aggregate of at least two of the previous five years, and the exclusion only applies to one sale every two years. A principal residence can include a house, condo, houseboat, or mobile home. The two required years of ownership and use do not need to be continuous or even overlapping (for example, owning a previously rented home). Short, temporary absences, such as for vacations, are counted as periods of use, even if the taxpayer/owner rented the property out. The gain exclusion for those married and filing jointly must meet additional requirements: either spouse can meet the ownership test, both spouses must meet the use test, and neither spouse made a gain exclusion on another property in the last two years.
IRA Distributions and First-Time Homebuyers
First-time homebuyers are those taxpayers who had no present interest in a principal home in the two years prior to acquiring a home (if married, both spouses must meet this requirement). These taxpayers are offered more incentives under tax law, including the ability to use retirement funds to finance a home purchase. Generally, withdrawals from an IRA before the age of 59 ½ are subject to tax and penalties. However, there is no penalty to withdraw funds from an IRA, up to $10,000 lifetime maximum, if the proceeds are used within 120 days to purchase a home.
Home-Related Business Deductions
More and more people are running a trade or business from their home, and if certain conditions are met, such taxpayers may be eligible to deduction qualifying expenses related to maintaining a home office. Such deductions are generally only allowed with respect to the part of the home that is used exclusively and regularly as a principal place of business. The expenses have to be categorized as direct or indirect expenses; alternatively, the amount of deductible expenses for a qualified business use within a home is determined by multiplying the allowable square footage by a prescribed rate.
Contact Us
If you have questions about the information outlined above or need assistance with another tax or accounting issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.