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One of the benefits of owning a Southern California home is that you pay your own mortgage rather than paying someone else’s. Another benefit is that you build up equity for yourself. Also, there are several tax benefits to owning a home. These reduce your adjusted gross income. In turn, that lowers the amount of taxes you pay Uncle Sam. The following are a few of the benefits you may want to keep in mind if you plan on buying a home anytime soon.
Tax Benefits of Owning a Home
You Can Deduct Your Mortgage Interest
One of the positive things you can say about paying higher interest rates is that you can deduct your mortgage interest at tax time. However, there is a limit to the mortgage debt you can claim the deduction on. For married couples filing jointly, the limit falls in line with the interest paid on the first $750,000 in mortgage debt. For individuals or married couples filing separately, that limit cuts off at the first $375,000. However, if you purchased your home before December 16th, 2017, the limit is $1,000,000/$500,000. Make sure you check your closing documents or 1098 you received from your lender to determine how much you paid in interest. This may be included in your mortgage interest deduction at tax time as well.
You Can Deduct Any Mortgage Points Paid
Sometimes, buyers pay “points” when they buy a home. These points help lower their interest rate. So, one of the other tax benefits of owning a home is that you may deduct these points from your taxes for the year you purchased or refinanced your home. This will also be shown on your 1098.
Your Private Mortgage Insurance May Be Deductible
If you put less than 20% down on your Inland Empire mortgage loan, your lender charges you Private Mortgage Insurance (PMI). The amount varies depending on the percentage you put down. According to Freddie Mac, expect to pay anywhere from $30 to $70 a month per $100,000 for PMI. There are limits to what you can deduct based on your household income. If your adjusted gross income falls below $100,000 (for married couples) or $50,000 (individuals or married filing separately), you can deduct the entire PMI paid. Household incomes above $109,000/$54,500 adjusted income cannot deduct any PMI. If your adjusted household income falls between these two amounts, you may deduct a percentage of your PMI.
A Portion (or All) of Your State and Local Taxes May Be Deductible
Another one of the tax benefits homeowners may see is from state and local taxes (SALT) paid throughout the year. The only caveat is that you must itemize your deductions to do so. They cap out at $10,000 for both state and local taxes combined for the year for both married couples who file jointly and individuals. That cap goes down to $5,000 if you are married but filing separately.
You Can Claim a Capital Gains Tax Exclusion
You sold your Inland Empire home at a profit. Congratulations! They call that profit “capital gains”. This is considered income. As such, it may be subject to income tax. Fortunately, you may exclude the first $500,000 in profit (for married couples) or $250,000 (for individuals or married, filing separately). So, if you and your spouse paid $150,000 for your home originally and sold it for $500,000, you would receive that $350,000 in profit tax-free. But, if you as an individual paid $150,000 and sold it for $500,000, you would still have to pay taxes on $100,000 of profit ($350,000 total profit minus the $250,000 capital gains exclusion). However, to claim a capital gains tax exclusion, you must have used your home as your primary residence for two of the last five years in order to qualify for this full exclusion. If you lived in it for less time, you may be able to claim a partial exclusion based on the time you lived there.
Other Tax Credits Available
In Riverside County, a homeowner who occupies the property they purchase as their primary residence may claim a Homeowners’ Exemption. This translates to up to $7000 off your property’s assessed value at tax time. That saves you roughly $70 per year. (Every bit helps, right?)
I am not a tax expert. Nor do I claim to be. Always, always talk to your tax preparer about these deductions before you sign your tax documents and send them in.
Muna Dionne, your Inland Empire specialist with Coldwell Banker Realty
