2018 Tax Deductions Available for Home Owners
2018 Tax Deductions Available for Home Owners
It is always great to be a homeowner. It is especially great during tax season. There are so many tax credits available to homeowners that can add up to thousands of dollars in savings. Happy you didn’t rent? Once you realize all of the possible tax deductions available to home owners, you’re sure to be.
It’s important to know you can only take advantage of tax credits if you know about them. And no one wants to walk away from savings when it comes to paying the Federal Government. Some tax credits are available to all home owners and some may only apply to certain home owners. Below you will discover what savings are in store for you.
Property tax deductions are a huge perk of being a home owner. But it was a bit sweeter in recent years. Previous to the new 2018 tax laws, all property taxes were deductible. So if you lived in an area where property taxes were high, you could end up deducting thousands of dollars. Homeowners are still allowed this tax deduction, however, it is capped at $10,000 in property taxes. If you live in a high tax state like New York, New Jersey, or California, you could see an increase in taxes due come April. In fact, there are over 4.1 million Americans who now fall into this category.
Home Sale Exemption:
If you sold your home for more than you paid for it, you made capital gains. The money you made is tax free, if you sold your primary residence (not a vacation or rental home) and made below the threshold. The threshold for married couples is $500,000 and the threshold for singles is $250,000. Want to know more on capital gains? We wrote an entire blog post about capital gains and how to pay the least amount possible HERE http://katyhomesearch.com/p/11742/capital-gains-what-you-need-to-know
Private Mortgage Insurance (PMI):
Many homeowners carry private mortgage insurance or PMI. PMI is required when home buyers are not able to put 20% down on the price of their home. It’s an insurance that protects the lender if the home buyer were to default on the loan. PMI fees vary from around 0.3 % to about 1.5 % of the loan amount and is paid monthly on top of the mortgage payment. An average American pays an extra $100 to $200 per month for PMI. Thankfully, it is tax deductible! How much you can deduct depends on how much you paid for PMI. And there is an exception: if you make over $109,000 in gross income per year, you can’t qualify for the deduction.
Bonus tip- as a home buyer you should know that it’s possible to stop paying PMI. Once you’ve paid 20% of the loan on your home, OR when you have gained 20% due to your home’s increase in value you can cancel PMI insurance. Want to know if you have 20% equity based on present home values? Give us a call, we would be more than happy to send you a report. [Kelly Ritz, Realtor® 281-578-3566]
When you buy mortgage points you’re essentially paying fees to the lender in order to get a reduced interest rate. You are essentially buying down the interest rate by paying some of your interest up front. One-point cost 1% of your mortgage amount. To make it simple, let’s say your loan amount is $200,000. One point would cost you $2000. Mortgage points are a great idea, if you plan to stay in your home for a long period because they truly do pay out over time. They’re also a tax deduction!
Energy Efficient Upgrades:
There are a ton of things you can do to make your home more energy efficient. Insulation, new windows, even having energy efficient appliances can help reduce your energy bill as well as your carbon footprint. But only some energy efficiency upgrades are tax deductible. There’s a great tool here http://bit.ly/2mVZWnh that lets you know what improvements are and are not tax deductible. Just select your state and then select “residential” and you’ll see what tax breaks are available to you. Certain cities offer different tax breaks than others so scroll through and make sure you see all that’s available to you!
Renewable Energy Upgrades:
Similar to the energy efficiency upgrades, the government offers certain tax breaks for renewable energy upgrades too. Renewable energy could be adding a wind turbine or adding solar panels. Adding renewable energy upgrades aren’t “one for one” though. Meaning, the amount you spend to add an energy upgrade isn’t the same amount you can deduct. In some areas, adding a renewable energy upgrade allows you to deduct very little. It’s important to do research before adding a renewable energy upgrade to see just how much can be deducted.
Home Improvement Loan Interest:
Certain home-improvement loans come with tax benefits as well. A HELOC loan, home equity line of credit, is a type of loan that acts more like a credit card. The home buyer is allowed to borrow a certain amount for an agreed period. As you pay off the loan, the credit resolves itself and you can borrow more again. Another example of a tax deductible home-improvement loan is a home equity loan. On a home equity loan, the borrower uses the equity of the home as collateral. In both of these examples, the home owner can deduct the interest paid on these loans. Similar to the mortgage loans, the tax benefits. You will benefit the most in the first few years, as this is when your payments are going toward the interest.
Home Office Deduction:
A lot of people dream of having the pleasure of working from home. Save money on gas, stay in your comfy clothes, and tax deductions! Yes! If you have a room dedicated solely to working - a home office, you get a tax break. The tax deduction is $5 per square foot on a room dedicated purely to working. For example, if you use your 10 x 10 spare bedroom as an office you would get a $500 tax break!
Mortgage interest deduction is most helpful in the first years of home ownership. That is because most loans are structured in a way that requires you to pay the interest before paying principal. In previous years, you could deduct up to one million dollars in interest paid on your home but the recent tax laws have lowered that amount to $750,000. The median home price nationwide is $254,000 so the majority of Americans will be unaffected. But if you live in a city where cost of living is high, this can make it tough when house hunting. In New York City, 64% of mortgages sold in 2017 were over $750,000 and in San Francisco nearly 58% were over $750,000.
What will this mean for the housing market?
Experts worry that the $750,000 cap on the mortgage-interest deduction, it will cause a downward pressure on home prices. Homeowners who were considering trading up for a higher priced home may now reconsider and stay in their current homes. This can also create a shortage in the housing market where homeowners who planned on trading up to a $750K + home are now holding onto their homes, making them unavailable for the next trade-up.
NAR, the National Association of Realtors, studies the housing market and predicts upcoming trends. NAR finds that there are 4 main factors that determine the state of the housing market.
- Current housing market conditions and momentum
- New tax law impact
- Interest rate effect
- Employment and construction scenarios
Across the US, NAR is still predicting an increase in pricing in the housing market. But a much slower growth in comparison to previous years. They are predicting this year’s growth to be between 1-3%. This is a lot slower compared to the nationwide gains of 5-7% that have occurred annually over the past 5 years.
Of course, local markets may experience gains and others markets will experience losses. The states NAR expects the strongest gains are Arizona and Colorado, and with a growth of 5-6%. However, New York, New Jersey, and DC are expected to see a home price decrease between 4-6.2%. States with a higher cost of living and higher taxes are predicted to see a hit from the new legislation.
The Bottom Line:
It’s predicted the majority of American’s will see increased home prices in their area over the course of the year. So now is the time to dive into these savings! Know what tax deductions are available to you. There’s so many ways to lower your taxes! You can get tax deductions on your home sale tax, PMI, mortgage points, energy efficient upgrades, renewal energy upgrades, home improvement loan interest, home office, and mortgage interest.