How Homeowners Can Find Tax Relief

Shannon McKee
Expert Contributor
Last Updated:
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It was the “American Dream” for past generations: Your own home on a nice piece of property with a white picket fence, 2.5 children, and perhaps a family dog or cat.

While 82% of millennials today view homeownership as the “American Dream,” according to a recent study by Clever Real Estate, they waited longer than past generations to finance that dream. The average age of first-time homebuyers is 32, compared to 29 and 30 years old in the late ‘70s and early ‘80s.

Owning a home has always been expensive, but it also comes with several tax benefits. While some of the tax laws related to home ownership have changed, owning a home still provides some tax relief over renting.

Let’s explore how tax relief for homeowners has changed in recent years.

Home Equity Loans May Not Provide the Tax Relief You Expect

In the past, conventional wisdom was to use the equity in your home as a way to get out of debt. People would take out a home equity loan to pay for their child’s education or to go on a big family vacation. They would take out this loan to pay off their credit card debt, get a better interest rate, and cut down on how much they’d owe over the long term. It was an easy way to gain access to a large amount of capital with a lower interest rate than most credit cards.

How Homeowners Can Find Tax Relief

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Then, when tax time rolled around, they would deduct the interest from their home equity loan on their taxes. That all changed with the Tax Cuts and Jobs Act of 2017. You can no longer use your home equity loan interest on your taxes in most instances. Using the money to pay off your debts is no longer an option if you want to take advantage of this tax deduction.

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However, if you use the money to improve the home secured by the loan, you can still deduct the interest. If you remodel, put on an addition, or make other home improvement efforts, you can deduct the home equity loan interest. For instance, you can get a home equity loan and deduct the interest if you use the money to put a new roof on your home or if you add an in-law suite.

The suspension of this deduction for home equity loan interest is not forever. It started this year and will continue until 2026, unless there’s another change in the tax code. It could still be a good idea to take a home equity loan to save money. Talk with a financial professional can help you determine if that the right choice for you and your family. Whether you can deduct the interest or not, be aware that the loan is secured by your home. That means if you can’t make your payments on time, you could lose your house.

Understand Mortgage Interest Deduction Changes

The tax changes didn’t change the ability for homeowners to deduct the interest they pay on their mortgage. For homes purchased before Dec. 15, loans up to $1 million can have the interest deducted. After this date, the loan limit is $250,000. This change ends in 2025 when it goes back up to $1 million.

Often, when you take a mortgage out with a smaller down payment, you’re required to purchase private mortgage insurance. In the past, you could deduct these premiums, but this ended in 2016. It is not part of the tax changes that were recently released, and it’s unknown if this will be an option again in the future. Be sure not to make the mistake of trying to deduct it on future tax returns.

While you can’t deduct your insurance premiums, you can still deduct your mortgage points. Lenders often charge “points,” at closing to reduce your loan’s APR. One point equals 1% of your loan’s principal amount, and may lower your interest rate by ¼ of an interest point, which can total tens of thousands of dollars over the life of a mortgage.

Property Tax Deduction Caps Could Hurt Homeowners in High-Tax Regions

The Tax Cuts and Jobs Act of 2017 also changed the way property taxes can be deducted. Homeowners can deduct up to $10,000 for their payments toward property tax, state income tax, state tax, and local sales tax. This number is the maximum, so if you pay $8,000 in property taxes, you can only deduct $2,000 when it comes to the other costs eligible under the act.

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Keep in mind: If money is set aside for the lender in an escrow account for property taxes, you can’t deduct it from your taxes until it’s used to pay them.

Home Office Deduction Could Raise Red Flags

When you have a space in your home you use exclusively for a business, you can potentially use this as a tax deduction. You can deduct the portion of your mortgage that pays for that space, as well as repairs, improvements, electricity, heating and cooling costs, insurance, and more.

However, some tax experts say the home office deductions can raise red flags to IRS auditors. The space must be used exclusively for your home business and you must show it is a legitimate, money-making business. Even then, it’s important to consult a tax professional to determine if this deduction is worth taking.

Deduct the Costs of Selling Your Home to Reduce Capital Gains Tax

If you sold your home during the year, you can deduct the expenses related to the sales process. This deduction can be very beneficial if you’ve made a significant capital gain on the proceeds of your sale. Some of the expenses you can deduct include legal fees, costs of advertising, broker’s commissions, escrow fees, inspection fees, and administrative costs.

There’s also a capital gains exclusion. Married taxpayers are allowed to keep profits of up to $500,000 on the sale of their principal residence tax-free. Single individuals, co-owners in the home, or married couples that file separately can all keep profits of up to $250,000 tax-free. They must have lived in the house for two of the last five years before the sale in order to be eligible.

Are you looking for help with your tax debt or other debt issues? You can turn to Solvable for help. Check out our site for information on how to handle your debt problems by leveraging our educational services and partnerships with reputable tax debt relief companies. Are you ready to take control of your financial future?

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Shannon McKee
Expert Contributor
Last Updated: