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Owning their own home is every American’s dream because it gives them stability and peace of mind. And there are also many tax benefits of owning a house.
You can save thousands of dollars over the life of the loan with these tax breaks.
In 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, which brought significant changes to the types of deductions homeowners can take advantage of.
As the bedrock of the American dream, U.S. policies have consistently favored homeownership. The two main benefits of homeownership before 2017 are:
Mortgage Interest Deduction
With the mortgage interest deduction, you could deduct any interest paid on your mortgage. This deduction also included any interest paid on home equity loans and HELOCs.
Property Tax Deduction
All state and local property taxes were fully tax-deductible. But, the TCJA capped these deductions at $10,000, which is not advantageous for homeowners living in high-tax states.
The 2017 Tax Cuts And Jobs Act
Following are the major changes that affect homeowners:
- Changes To The Mortgage Interest Deduction
Homeowners can still benefit from the mortgage interest deduction, but The TCJA has capped it.
You can claim the interest paid on up to a $750,000 mortgage if you’re an individual taxpayer or married couple filing a joint return.
For homes purchased after 2017 the limit for married couples filing separately, is capped at $375,000. Only if the home equity loan is used for capital improvements to the house, does the TCJA approve of all deductions.
- Changes To The Standard Deduction
TCJA doubled the standard deduction. Meaning that most taxpayers don’t need to itemize their deductions to enjoy the mortgage and property tax deductions.
The Current taxpayers may actually be enjoying a greater tax benefit compared to what they did from the previously taken deductions.
- Changes To SALT Deductions
Homeowners also enjoy SALT which is a deduction for state and local taxes. There is a $10,000 cap by the TCJA on SALT deductions for single taxpayers and married couples filing jointly.
But this change is hurtful for taxpayers living in states with high property taxes like New York, New Jersey, California, and Massachusetts.
Are closing costs still tax deductible?
Your home mortgage interest and specific real estate taxes closing costs that are tax-deductible. If you itemize your taxes then you can deduct these for the previous year.
Can you still deduct PMI Or MIP?
Other home-related deductions
Other tax deductions that were left unchanged by the TCJA can be benefitted by homeowners. Self-employed individuals can add a home office deduction if the deductions were itemized.
And if you have done energy-efficiency improvements then you can benefit from tax credits.
With a tax deduction, you can lower your taxable income, meanwhile, a tax credit reduces your taxes and leads to a larger refund.
With so many changes imposed by the TCJA, if you are wondering if it is still worthwhile to purchase a home in 2021?
Then the answer is yes – the wealth accumulation and capital gains exemption means that ownership of a home is still a worthwhile endeavor.
Wealth Accumulation
You’re building equity in your home every time you make a mortgage payment. during the entire period when you own your home this equity grows untaxed.
Whereas, renters don’t have the option to build any equity.
Depending on your situation, renting for some time may be the right choice, but you’ll miss out on homeownership-provided wealth-building opportunities.
The Capital Gains Exemption When You Sell
Homeownership is still an important way to accumulate wealth, even if it doesn’t give you the same tax advantages you would have received prior to 2017.
And when homeowners sell their primary residence they get to enjoy the exemptions to the capital gain tax.
Homeownership is a valuable way to build wealth in 2021. And there are many tax benefits of buying a house.
Reference Source: Rocket Mortgage
