Surprise: your home might not be the tax break you thought it would be
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Homeownership has long had its share of benefits. On the one hand, owners often have more stability than tenants because the property they own is seen as an asset. If you are a homeowner, you may have the option of borrow against him through a home equity loan or line of credit. And you can potentially use your home as a source of income, renting spare bedrooms or a finished basement to raise extra cash.
Owning a home could also, in some cases, be a significant tax break. But if you are thinking about buying a home and are very motivated by this tax break, you should know that you might not get it.
What household expenses can you deduct from your taxes?
Homeowners have the option of both deducting their mortgage interest and property taxes on their annual IRS returns. If you bought your home after December 16, 2017, you can deduct interest on mortgage debt of up to $ 750,000. However, if you bought your house before that date, you have acquired rights under the old tax rules, which allowed you to deduct interest on a mortgage up to $ 1 million.
During this time, you can deduct up to $ 10,000 in combined state and local taxes, and that includes your property taxes. Suppose your annual property tax bill is $ 4,000, but you also pay $ 7,000 in state income taxes. This means that you will effectively lose $ 1,000 of this deduction since it is capped at $ 10,000.
Why many homeowners don’t write off real estate expenses on their taxes
When it comes to filing your taxes, you have two choices: you can claim the standard deduction or itemize your deductions on your annual return.
Currently, the standard deduction for single filers is $ 12,400, and it is $ 24,800 for married couples filing jointly. In 2021, it will increase to $ 12,550 for single filers and $ 25,100 for couples filing jointly.
For the breakdown to make sense, your total deductions will need to exceed the limit that applies to you. For the current year, if you are single, you will need over $ 12,400 in total deductions to itemize rather than claiming the standard deduction. But most tax filers actually take advantage of the standard deduction when they file their returns, and if you end up doing the same, you won’t be able to deduct your mortgage interest or property taxes.
It’s for this reason that you shouldn’t be looking to buy a home just for tax breaks – because unless your itemized deductions are high enough, you might not benefit from mortgage interest amortization and property taxes. .
Instead, you should buy a house because you want:
- The stability of having your own home (a landlord can’t decide to evict you – although a mortgage lender can force you to leave if you don’t pay your mortgage)
- The ability to call your own shots and not have to follow an owner’s rules
- An opportunity to build up capital
- The option of owning an asset that could increase in value over time
Of course, if you To do end up claiming mortgage interest and a property tax deduction on your IRS returns, great – those are more savings to come. But even if that’s not an option for you, owning a home is still something worth doing. Just make sure you go with the right attitude – that tax relief would be nice, but not guaranteed.