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8 Tax Benefits of Buying a Home in 2022
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If becoming a homeowner is on your goal list, you’ll be pleased to know there are several tax benefits of buying a home. These include tax deductions, which help taxpayers reduce their taxable income and overall tax bill.
Below, we highlight eight tax benefits of homeownership.
1. Mortgage interest deduction
You can deduct the interest paid on up to $750,000 of mortgage debt if you’re an individual taxpayer or a married couple filing a joint tax return. For married couples filing separately, the limit is $375,000. If you bought your home on or before Dec. 15, 2017, the mortgage interest deduction limit is $1 million for single filers and married couples filing jointly and $500,000 for married couples filing separately.
The same deduction limits apply to the interest paid on home equity loans and home equity lines of credit (HELOCs). If you’re a single taxpayer and the combined amount of your first mortgage and HELOC is less than $750,000, for example, you’re allowed to deduct the full amount of interest paid on both loans — if they were both used to build, buy or make improvements to your main or second home.
2. Mortgage insurance deduction
If you pay for mortgage insurance as part of your monthly mortgage payment, you may qualify to deduct that expense from your taxable income. Mortgage insurance protects your lender if you can’t make your mortgage payments and go into mortgage default.
Homeowners with an adjusted gross income up to $100,000 (or up to $50,000 if they’re married and filing separately) can deduct their mortgage insurance premiums. There’s a reduced deduction amount for incomes up to $109,000 (or up to $54,500 for those married filing separately); if your income is above these amounts, you wouldn’t qualify to deduct your mortgage insurance premiums.
3. Mortgage points deduction
Another one of the tax benefits of buying a home is the ability to deduct mortgage points you paid upfront when closing on your home purchase. One mortgage point, also called a discount point, is equal to 1% of your loan amount.
Generally speaking, you’ll deduct points over the life of your loan rather than in the year you paid them. However, there is an exception to this rule if you meet a series of tests, as outlined by the IRS. The tests include:
→ Having a mortgage that is secured by your main home.
→ Paying for points that didn’t cost more than what is generally charged locally.
→ Paying for points that weren’t paid in place of other closing costs, such as appraisal or title fees.
Visit the IRS website for the entire list of tests you’ll need to pass to fully deduct mortgage points in the year you paid them.
4. SALT deduction
There’s a deduction for state and local taxes (SALT), which includes property taxes. The deductible amount is capped at $10,000 for single taxpayers and married couples filing taxes jointly. The deduction limit is $5,000 for married couples filing separately.
The cap on the SALT deduction may not benefit homeowners in states with high property taxes, such as:
→ New Jersey
→ New York
5. Tax-free profits on your home sale
One of the tax benefits of owning a home doesn’t kick in until after you sell your home — tax-free profits.
If you sell your house at a profit, your capital gains are tax-free up to $250,000 if you’re single, and up to $500,000 if you’re married filing jointly. You must have lived in and used the home as your primary residence for at least two of the five years before the sale date to qualify for this tax perk.
6. Residential energy credit
There’s an eco-friendly tax break for homeowners, known as the residential energy-efficient property credit. The incentive applies to energy improvements made to a home, which might include installing solar panels and wind turbines, among other energy-efficient upgrades.
The residential energy credit ranges from 22% to 30% of the improvement cost, depending on what year the energy upgrades were made, and expires Dec. 31, 2023.
7. Home office deduction
If you work from home or have a home-based business, you may qualify for the home office deduction, which applies to both homeowners and renters. To qualify, a portion of your home (a bedroom-turned-office, for example) must be used exclusively and regularly for business purposes. You must also show that your home is the main location used to conduct your business.
8. Standard deduction
It’s important to look closely at the standard deduction allowed by the IRS while considering the available tax deductions for homeowners. If you decide to take the standard deduction, that means you agree to deduct a set amount of money from your taxable income. Taking the standard deduction also means you can’t itemize your deductions, and vice versa.
Here are the standard deduction amounts for each taxpayer category for tax years 2021 and 2022:
|Tax filing status||2021||2022|
|Married filing separately||$12,550||$12,950|
|Head of household||$18,800||$19,400|
|Married filing jointly||$25,100||$25,900|
If the deductions you qualify for as a homeowner are higher than the standard deduction amount tied to your tax filing status, then it may make more sense for you to itemize your deductions — otherwise, the standard deduction may work in your favor. Consult your tax professional for specific guidance.