Buying a new home can be one of the most exciting times of your life, but it can also leave you a little strapped for cash at the end of the day. While this makes sense, as houses are among the most expensive purchases you will make in your life, it still leads many people to look for ways to save every possible dollar throughout the homebuying process. Some people come up with ideas that are not very beneficial to them in the long run - like trying to buy a home without a realtor or trying to spread their mortgage out over as many years as possible – and they ultimately wind up worse off than they were before they started. If the thought of skipping out on having a realtor has crossed your mind, be sure to read this post on the importance of having a realtor.
Anyway, this post is going to outline one of the easiest ways to put a few dollars back into your bank account after buying a home, which is by taking advantage of the numerous tax breaks available to homeowners. The government likes to incentivize people to buy houses, and the slew of tax credits and deductions available to homeowners is clear proof of that. Simply owning a home offers several financial incentives each year at tax time, and this post is going to provide a quick overview of them all. Keep in mind that these are all tax deductions, meaning that they reduce your taxable income but don’t equate as direct savings.
1. Mortgage Interest Deduction
The first thing on the list of tax breaks for new homeowners is incredibly easy to take advantage of, and it is the mortgage interest deduction. If you have a mortgage on your home, the IRS allows you to write off the interest that you pay on your mortgage as an itemized deduction. There is a limit of $750,000 for people filing as single or jointly as married, but this figure is far higher than the vast majority of people ever pay.
2. Property Tax Deduction
As a homeowner, you will be paying property taxes. This is one of the unfortunate costs of homeownership that you can never escape. However, the IRS does at least look favorably on this during tax season, as they will allow you to deduct up to $10,000 of property tax if you are married and filing jointly, or up to $5,000 if you are filing as single or married separately. This applies to every homeowner but applies more to some than others due to the amount of property tax that you pay. Most people do not pay $10,000 in property taxes, but some do, making this quite the deduction!
3. Home Office Expenses Deduction
This tax deduction is one that applies to almost everybody in some capacity, and can be utilized fairly liberally. Especially now in the era of work from home - but even before – the IRS allows homeowners to deduct several expenses that are incurred by working out of one’s home. A very wide range of things can fall into this category, often including Wi-Fi, electricity, and furniture. The rules are also fairly flexible, making just about anyone qualify for this deduction to some degree. You do not need a fully remote job or your own business to qualify for this tax deduction in most cases, making it a very popular deduction every January!
4. Capital Gains Allowance
Capital gains tax is the tax you pay on the growth of any investments that you sell. When you buy and sell stocks, for example, you pay taxes on any money that the stocks you sold made while you owned them. The IRS also sees your home as an investment, and thus considers any gains you make from the sale of your house to be capital gains. In a rare turn of events, the IRS is actually very friendly to taxpayers who make a gain from selling their home, allowing them to keep the gains of up to $500,000 if married filing jointly or $250,000 if single or married filing separately, all without any taxation.
5. Necessary Home Improvements Deduction
The IRS allows you to write off any necessary improvements you make to your home over the course of the year. This could be a new roof, a new air conditioning, new piping systems, and more. This tax break can turn out to be very valuable, as some of the major maintenance costs of owning a home, like replacing a roof, are pretty costly. This tax deduction is a bit stricter, and the IRS defines what is “necessary” and what is not. Before making any upgrades to your home and banking on getting a tax break, make sure that the IRS considers them to be necessary. Also, be sure to keep your receipts!
6. Home Equity Loan Interest Deduction
This one is very niche and applies to a lot fewer people. Still, it is worth mentioning in this post! A home equity loan is a secondary loan that you take out to cover large expenses, using the equity that you have already gained on your home as the collateral. Just like the mortgage interest deduction, the IRS allows you to deduct any interest paid on a home equity loan over the course of the year. The only caveat, which is a pretty big one, is that the loan must have been used to pay for necessary home improvements. If you used the loan for a different purpose, this one does not apply to you.
7. Mortgage Insurance Deduction
If you have opted to enroll in mortgage insurance coverage, the IRS allows you to use the premium payments as an itemized deduction on your tax return. What is mortgage insurance, you might ask? Mortgage insurance is optional coverage that you may elect to purchase when you take out a mortgage. Mortgage insurance is used to guarantee any payments to the mortgage company in the event that you are unable to make your mortgage payments. This protects the lender and can protect your credit future.
Thanks for reading our post about tax breaks for new homeowners! Buying a new home can put a major financial strain on you or your family, and hopefully taking advantage of these tax breaks can help to create a little bit more wiggle room in your budget. As always, be sure not to bank on these things as part of your budget – relying on them to keep you afloat may be successful a lot of the time, but if you are not careful, it will lead you with a much higher tax bill than expected.
If you visit Myrtle Beach or any other place in South Carolina and fall in love, we’re here to help. We at The Boyd Team are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.
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Written by Zohra
