Thursday, February 10, 2022
by The Hat Team
While there are many perks to home ownership (and tax breaks are a big one!), people who are beginning the journey of purchasing a home may be easily misled by common homeowner tax myths.
First, it is important to note that owning your own home does come with tax benefits. For example, a conventional loan’s PMI (private mortgage insurance), the VA loan funding fee, the USDA loan guaranteed fee, and FHA loan upfront mortgage insurance premiums are each tax deductible per the IRS. But as a first-time homeowner, it’s important that you educate yourself on extended tax benefits so that you will know what you can and cannot deduct. Because, unfortunately, some things you might have heard about homeowner tax perks may not be true.
MYTH: DEDUCTIONS ALWAYS CUT YOUR TAX BILL IN HALF
TRUTH: While it is possible for your home ownership deductions to reduce your tax bill, it is not a guarantee. In order to claim deductions, they must add up to more than the combination of the standard deduction and non-home related write-offs, such as sales taxes or charitable donations. You also will have to itemize your deductions. Timing, in this case, is everything. For example, if you close on your home in April, you will make several mortgage payments throughout the tax year and chances are that you will exceed the standard deduction and write-offs, in which case your tax bill will be reduced. But if you close in November, you might only make one mortgage payment in the taxable year and you likely won’t exceed the standard deduction, meaning this is one homeowner tax perk that you won’t be able to enjoy until the following tax year.
MYTH: EVERY PAYMENT MADE AT CLOSING IS DEDUCTIBLE
TRUTH: Some closing costs are deductible. Not every fee you pay at your home closing can be written off. The following closing costs ARE deductible: real estate taxes, mortgage interest, and PMI (private mortgage insurance). You will not receive a tax break for your homeowner’s or flood insurance premiums. The same applies to appraisal fees, escrow accounts for property insurance and taxes, and title insurance.
MYTH: HAVING A HOME OFFICE IS A GUARANTEED DEDUCTION
TRUTH: Having a home office can indeed provide a deductible…for those who qualify. You must keep in mind that the IRS’s definition of a “home office” is very specific. The following will qualify you for a home office deduction: you are self-employed, own a small business, work from home and have turned one of your home’s rooms into your office space. If you just work from your couch with your laptop, it doesn’t qualify as a “home office” in the eyes of the IRS.
If you fill out a W-2, your home office is NOT deductible.
Purchasing your first home can be an overwhelming and sometimes intimidating process. Education yourself about homeowner tax breaks is one step you can take toward becoming a knowledgeable, prepared homeowner.
If you are in the market to buy or sell a home (or both), let me, Sandra Nickel, and my Hat Team of Professionals assist you with all your real estate needs! Call us today at 334-834-1500 and check out https://www.homesforsaleinmontgomeryalabama.com for more information.
Photo Credits: Canva, fool.com, pod.com
