Homeownership can be expensive and may even seem out of reach for many Americans. The down payment, property taxes, maintenance and utilities, as well as mortgage payments and the cost of ownership can really add up. Add a real estate market with exorbitant real estate values; you might be wondering if owning a home is worth it. Fortunately, there are a few tax deductions for homeowners that can help make home ownership a little more affordable.
Read on to learn more about the various tax deductions available to home buyers and current owners. With record mortgage rates, some of these deductions may be worth less than they were in the past, especially when paired with soaring real estate values ââacross much of the country.
The Tax Cut and Jobs Act (TCJA aka Trump Tax Plan) has surprisingly reduced the tax benefits of owning a home for millions of Americans. The mortgage deduction, long the darling of tax breaks for homeowners, has been rendered irrelevant for the overwhelming majority of homeowners. First, the TCJA reduced the amount of mortgage debt that would benefit from the mortgage deduction. Second, it restricted tax deductions for home equity loans. Third, it eliminated the home office deduction for many American workers. It became particularly painful during the COVID-19 pandemic, when much of the US workforce suddenly worked from home.
To be fair, some tax deductions for homeowners remain. You could potentially still get a write-off for âmortgage interestâ on an RV or potentially a boat. There has been some relaxation of a rule for retirement account withdrawals to buy a home. (This is something I’m against, in most circumstances.)
Here are some tax questions I often hear from homeowners.
Can I still deduct my mortgage interest?
I’m a financial planner in Los Angeles, so most of the people I talk to locally will always be part of the group of homeowners who can deduct their mortgage interest. For much of the country, the answer is – “It depends.”
In recent years, over 90% of taxpayers have simply used the “standard deduction”. This does not mean, however, that they were not eligible for the mortgage deduction; that means their taxes haven’t gone down at all for incurring mortgage interest. For 2021, the standard deduction is $ 25,100 for married filers who file jointly.
Can I deduct my property taxes?
Again, the answer is yes and no. The TCJA instituted a cap on the deduction for state and local taxes (SALT) at just $ 10,000 per year. This is regardless of whether you are married or single (thanks to the marriage penalty). I had just reviewed the taxes of my high-income clients in Manhattan, and this change alone was costing them over $ 200,000, per year, in lost tax deductions. OUCH! Technically, the first $ 10,000 of their state and local taxes is deductible. Beyond that, they do not benefit from any tax advantage at the federal level.
At current house prices, this SALT cap will hit those who are well below the median house price in Southern California, assuming they have a job to pay for the house. Well, if you don’t have any income, tax deductions don’t matter that much.
How much mortgage interest can I deduct in 2021?
For mortgages issued after December 15, 2017, taxpayers can only deduct interest on the first $ 750,000 of mortgage debt. This debt can be held on up to two homes, which is good news for those who bought a second home during the COVID pandemic.
For homeowners who have had their mortgages for longer, especially those issued before December 15, 2017, a âgrandfatherâ provision allows for interest deductions on up to $ 1 million in mortgage debt, again , on a maximum of two houses.
Note that the $ 750,000 mortgage limit applies per tax return, so homebuyers who are not married could potentially buy a home (or even 2 homes) together and deduct interest on up to $ 1. , $ 5 million in mortgage debt. (They would also get a total of $ 20,000 in combined SEL deductions). I work with a lot of long-time same-sex couples, and a few have made the decision not to get married (yet) based on the various marriage penalties in the current tax code.
I work from home; can I claim the home office deduction?
If you are an employee of a business, you can no longer claim the home office deduction.
However, if you are a self-employed person or a business owner (this can be part-time or even on the side), you may be eligible to deduct home office expenses. To qualify for the home office deduction, the space should be used regularly and exclusively for this business. Placing your laptop in the middle of your home gym during a pandemic likely won’t make that space eligible for the home office deduction. Unless you’re a social media fitness influencer, using the space to film content.
Can I use my 401 (k) or IRA to buy a house?
Congress has made it easier to access your retirement accounts for reasons other than retirement. As part of pandemic relief, you can potentially withdraw up to $ 100,000 from your IRAs and maybe even your 401 (k) without being hit by the 10% early withdrawal penalty. Taxes will still be due on the withdrawal, but they can be spread over three years. Think long and hard before you mortgage your retirement security to buy a home. Depending on your retirement savings and age, withdrawing $ 100,000 now could add years and years to the time you need to work to fund a secure retirement.
Overall, I am a fan of home ownership. I have seen the benefits in the long run. I have also seen the devastation rush shopping can wreak on a family’s household finances. While the various tax breaks can make home ownership more attractive, they should never be the only reason you buy a home.