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6 popular homeowner tax breaks

New home house owners family with realtor sold sign

Being a homeowner can be a royal pain in the tush. I speak from experience. The hubby and I have bought a condo and five houses over the years.

But, as you can tell from my buying string, it's my preferred living arrangement. And a lot of people joined us in the in the homeownership club in 2020. The National Association of Realtors says last year's housing boom was driven by sales of existing homes.

The specific numbers from the NAR report released Jan. 22 show existing home sales totaled 5.64 million in 2020. That's 5.6 percent higher than in 2019 and the highest level since 2006.

Concerns about home shopping during COVID-19 didn't deter buyers, who apparently didn't want to miss out on record low mortgage interest rates. And the pandemic might even have helped, as people looked for more desirable places to self-isolate.

In addition to achieving what many still view as a big part of the American Dream, owning a personal residence still offers a wide variety of tax breaks.

Here are 6 popular home-related tax savings.

1. Deductible mortgage interest: This usually is the largest tax break for homeowners, especially earlier in their loan's life and as long as they itemize. However, the amount you can deduct depends on when you got your mortgage.

The Tax Cuts and Jobs Act (TCJA), the GOP's tax reform bill that became law in 2017, reduced the size of home loans to which this tax break applies.

For mortgages taken out on Dec. 16, 2017, or later, interest on the loan is deductible on home debt up to $750,000. The limit is $375,000 for married homeowners who file separate returns.

If you got your mortgage between Oct. 14, 1987, and Dec. 15, 2017, you can deduct the interest on up to $1 million of the home loan, or $500,000 for married homeowners who file separately.

Refinanced mortgages also are affected by the original loan's origination date. Where the loan was before Oct. 14, 1987, all the interest may be deductible.

In all cases, the qualifying loan must be to buy, build or substantially improve your primary home or a second residence.

2. Some home equity loan interest deductible: Interest on a home equity loan and home equity line of credit (HELOC) also may be deductible, but again the TCJA changed this tax break.

Before the 2017 tax law change, you could deduct the interest on these home-related loans regardless of how you used the money. That made home equity loans and HELOCs popular ways to pay for a variety of things, from vacations to college costs.

Now, however, interest paid on a home equity loan or HELOC can be deducted only when it is used on improvements to the residence that secures the borrowed money.

Be careful, too, about the size of your additional home-related borrowing. The amount of a home equity loan or HELOC counts toward the total mortgage debt limit. That's $750,000 or $1 million depending on the date of the original mortgage, as noted in basic home loan interest deduction discussed in #1.

3. PMI counts in some cases as deductible interest: If you can't come up with a 20 percent down payment when you get your loan, your lender likely will require you buy private mortgage insurance. This coverage is for the institution providing the loan in case you ultimately aren't able to make your payments, but you the buyer pay for it.

This added amount usually is rolled into your monthly mortgage payment. PMI-paying homeowners, however, get a bit of a break. The PMI amount is considered for tax deduction purposes as interest on the residential loan.

The bad news is that this is a temporary tax break that must be renewed by Congress as part of a perpetually expiring group of tax laws known as extenders. The good news is that last December, Congress agreed to keep the PMI deduction in effect for the 2020 and 2021 tax years.

4. Property tax deduction, within limits: Stop me if you've heard this before, but the TCJA also limits this popular home-loan tax break.

Before the tax reform law, all real estate taxes were fully deductible, again as an itemized amount on Schedule A. Now only up to $10,000 of property tax, along with any state and local income or sales tax you pay, is deductible.

This isn't an issue for most homeowners. If, however, you live in an area where homes are expensive, this so-called SALT (for state and local taxes) cap could cause you to lose some of your deduction.

5. Tax-free home sale profit: Probably the best tax break for a home comes when it's no longer your house. In most cases, the profit home sellers get is tax-free. 

This tax break has been around since the enactment of the Taxpayer Relief Act of 1997 back on May 7, 1997. It says that when a homeowner sells a residence, he or she can exclude sale profit up to $250,000. The tax-free profit is twice that for married jointly filing home sellers.

As you've figured out from my residential ownership history noted at the top of the post, the hubby and I have taken full advantage of this tax-saving benefit. You, too, can qualify for this tax exclusion, as long as you meet three conditions:

  1. You must own the house for at least two years. Married couples need to note who's on the deed. If it's just one spouse, then that owner must meet this ownership time. But both of you must live in the house the requisite length of time -- two years -- to pass the use test.
  2. You must live in the house as your primary residence for two of five years before you sell it. The good news here is that that the two years don't have to be consecutive. But unlike the ownership rule for a married jointly filing couple, the time living there requirement applies to both spouses, even if only one is the owner.
  3. You haven't used this sales tax break for at least two years. This limit was created to keep house flippers from serial selling at a rapid pace and avoiding capital gains tax on their profits. And married couples again need to be careful here. If either spouse sold a home and used the capital gains tax exemption within the last two years, you can take advantage of it again on your jointly sold home.

Again, unless you live in a place where home prices have really escalated over a short term or you've lived in your home long enough to see significant appreciation in your home's value, staying under the $250,000/$500,000 profit exclusion amount won't be a problem.

And if you get more than that for your house, don't come crying to me. You'll get no tax bill sympathy in these cases!

There is, however, a way you might be able to keep your profit within the tax-free range. And that brings us to homeownership tax break #6.

6. Improvements as tax-saving upgrades: When you sell, you'll figure your hopefully tax-free profit by subtracting your home's basis from its sales amount. Your property's basis basically is what you paid for the house plus any improvements.

That means the material upgrades you made to your house, while not being a direct tax savings when you shelled out the money to the contractor, can help you when you sell. Keep good records of qualifying house work, such as an addition or substantial landscaping. If you're near the tax kick-in on your home sale profit, those added basis costs could save you thousands in capital gains taxes.

Itemizing required: Before I wrap up this post, I want to make it clear that to take advantage of several of these tax breaks, you must itemize.

And you'll do that only if your home-related and other allowable itemized expenses are more than the standard deduction amount for your filing status.

For 2020 tax returns, those standard deductions are:

  • $12,400 for single taxpayers and married couples filing separate returns,
  • $18,650 for heads of households and
  • $24,800 for married jointly filing couples and surviving spouses.

For 2021 planning purposes, those amounts are bumped up by inflation a bit:

  • $12,500 for single taxpayers and married couples filing separate returns,
  • $18,800 for heads of households and
  • $25,100 for married jointly filing couples and surviving spouses.

If a quick look at your possible tax-deductible property costs, along with your deductible medical costs, reveals that the total is less than your standard deduction amount, then you don't need to mess with Schedule A record keeping and filing.

But if your home's deductions can push you over your standard amount, then by all means itemize and claim that large deduction.

Home before taxes: If you're one of the new homeowners, welcome to my property-owning world. It can be annoying, as you'll discover when you have to deal with all those routine (and sometimes costly) maintenance matters that don't offer any tax benefits.

But you'll also like being in total control — unless you have a really picky homeowners' association, and no, those annual fees aren't tax deductible — of your abode.

And finally, really this time, I must paraphrase an old adage. Home is where your heart, not just your tax savings are.

Even where your house provides you some tax benefits, it is much more than that. It's your home. Cherish and enjoy it!

You also might find these items of interest:

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