For millions of us, owning a home is the ultimate American Dream. But achieving that dream is full of challenges, from saving money for a down payment, budgeting for on-going expenses, and even dealing with a large tax bill once you sell a home.
Fortunately, there are a handful of different tips and tricks you can use to buy a home, reduce your tax bill by owning a home and even lowering your taxes when you sell a home.
Here’s a quick list of different tax breaks available to savvy homeowners.
1. Tap Into Your Retirement Accounts For A Down Payment
If you dream of owning a home, but don’t have the required down payment money saved, consider “borrowing” the money from your retirement account.
If you have a 401(k) or an IRA account, you can borrow up to $10,000 from the account to use as your down payment without having to pay the early withdrawal penalty. If you are married and your spouse has their own retirement account, they can do the same. This could provide up to $20,000 towards the down payment. We use the term “borrow” from your account because the funds will need to be paid back to avoid penalties. You will also have to pay taxes on the money that is withdrawn from the account, unless you are pulling the money from a Roth IRA since that money has already been taxed.
2. Deduct Points Paid On Your Mortgage
If you pay points as part of your mortgage financing, you can deduct them in the same year you paid them if the home is your primary residence. If the mortgage is on your vacation or second home, the points are still deductible, but the deduction will be spread out over the term of the loan.
A 30-year loan means you can deduct 1/30 of the points every year. Also, this deduction is only available if you itemize your taxes.
3. Mortgage Insurance Premiums Are Deductible
If you put down less than 20% of your purchase price, chances are your loan carries PMI, or private mortgage insurance.
This deduction may expire at the end of this year, but for now, your PMI payment is deductible if you itemize your deductions. The deduction is phased out if your adjusted gross income exceeds $100,000 and disappears completely if your adjusted gross income exceeds $109,000.
4. Mortgage Interest Deduction
This is the big one for homeowners: deducting mortgage interest. If you itemize your taxes, you can deduct interest on up to $750,000 of debt used to buy, build or substantially improve your primary home or a single second home.
What’s “substantial” you ask? Additions and major renovations are “substantial,” but basic repairs and maintenance are not.
5. Property Taxes
If you itemize, you can deduct up to $10,000 in property taxes on your federal tax return.
If you are in a high-tax state, this deduction may only take a small bit out of your tax bill.
6. Work From Home? Write The Space Off
If you are self-employed and work from home, there are two options. One is to take the “actual expense” method where you take the square footage of your home office in comparison to the total square feet of the home and deduct that percentage of the rent/mortgage, utilities, insurance, etc.
For example, if your home office is 100 sq. ft and your home is 1,000 sq. ft, you can deduct 10% of your costs. The “simplified” method is to deduct $5 per square foot.
So in the previous example, you can deduct $500 (100 sq. ft x $5).
7. You Can Even Save On Your Capital Gains When You Sell Your Home
If you are single, you don’t have to pay taxes on the first $250,000 in gains when you sell a home. If you are married, that amount jumps to $500,000. There are some requirements, such as having lived in the home for at least two out of the past five years, but otherwise it’s a straight-forward way to save on capital gains taxes.
These are just a few ways to creatively come up with a down payment and save money while owning a home. There are plenty more tips and tricks available, and we suggest you talk with your financial advisor or a tax professional to determine what options are available and best fit your personal situation.