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Homeownership has long had its share of benefits. For one thing, homeowners often have more stability than renters because the property they own is considered an asset. If you own a home, you may have the option to borrow against it via a home equity loan or line of credit. And you can potentially use your home as an income stream, renting out spare rooms or a finished basement to drum up extra cash.
Owning a home could also, in some cases, serve as a major tax break. But if you're planning to buy a home and are highly motivated by that tax break, you should know that you may not get it.
What home expenses can you claim on your taxes?
Homeowners have the option to deduct both their mortgage interest and property taxes on their annual IRS returns. If you bought your home after Dec. 16, 2017, you can deduct interest on up to $750,000 in mortgage debt. However, if you purchased your home prior to that date, you're grandfathered into the old tax rules, which let you deduct interest on a mortgage of up to $1 million.
Meanwhile, you can deduct up to $10,000 in combined state and local taxes, and that includes your property taxes. Say your annual property tax bill is $4,000, but you also pay $7,000 in state income taxes. That means you'll effectively lose out on $1,000 of that deduction since it's capped at $10,000.
Why many homeowners don't write off property expenses on their taxes
When it comes to filing taxes, you have two choices: You can claim the standard deduction or itemize your deductions on your yearly return.
Currently, the standard deduction for single tax-filers is $12,400, and it's $24,800 for married couples filing jointly. In 2021, it will increase to $12,550 for single filers and $25,100 for couples filing jointly.
For itemizing to make sense, your total deductions will need to exceed whichever limit applies to you. For the current year, if you're single, you'll need more than $12,400 in total deductions to itemize rather than claim the standard deduction. But most tax-filers do, in fact, take the standard deduction when they file their returns, and if you end up doing the same, you won't get to deduct your mortgage interest or property taxes.
It's for this reason that you should not seek to buy a home for the tax breaks alone -- because unless your itemized deductions are high enough, you may not benefit from writing off mortgage interest and property taxes.
Instead, you should buy a home because you want:
- The stability of having a place of your own (a landlord can't decide to kick you out -- though a mortgage lender can force you to vacate if you don't pay your mortgage)
- The ability to call your own shots and not have to follow a landlord's rules
- An opportunity to build equity
- The option to own an asset that could increase in value over time
Of course, if you do end up getting to claim a mortgage interest and property tax deduction on your IRS returns, great -- that's extra savings coming your way. But even if that's not an option for you, owning a home is something that's still very much worth doing. Just make sure you go into it with the right attitude -- that a tax break would be nice, but is not guaranteed.