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Becoming an NYC homeowner comes with many perks, not the least of which are tax benefits you can enjoy from certain deductions associated with property tax, mortgage interest, and many other tax reliefs. These tax benefits can save you a lot of money each year.
Below, we’ve outlined some of the most significant tax benefits you can enjoy as an NYC homeowner. Consider these when considering the ownership costs with a potential home purchase.
Mortgage Interest DeductionMortgage Interest Deduction
Homeowners with a mortgage no greater than $750,000 are entitled to an interest tax deduction on your loan. Since your mortgage interest makes up a substantial part of your monthly payments, this can equal thousands of dollars in savings yearly.
This deduction is through the Tax Cuts and Jobs Act (TCJA), which first became effective on January 1, 2018. Deducting most (if not all) of your mortgage interest yearly also applies to any Home Equity Lines of Credit (HELOC).
Property Tax DeductionProperty Tax Deduction
When federal tax time comes around, you can deduct most of the state and federal property taxes you’ve paid. However, due to the TCJA, there is a $10,000 limit on how much you can deduct. In addition, this property tax deduction does not apply to any rental or commercial properties. This can still be a sizeable tax deduction for many homeowners.
There are a couple of ways to claim this tax deduction. Those who use an escrow account to pay their taxes can see the amount they paid on their IRS Form 1098, giving you the deduction directly from your taxes. The other way is to submit your taxes directly to your municipality. Just make sure you keep a record of taxes paid.
Mortgage Points DeductionMortgage Points Deduction
Mortgage points, also known as discount points, are fees paid as part of a mortgage loan or refinancing. One point is equivalent to 1% of your loan amount and can quickly add up to several thousand dollars. The good news is that you can deduct the money paid towards points each month.
The IRS has some strict tests that must be passed to get the full deduction on any mortgage points paid. You can find the full list of these tests on the IRS website. However, getting this deduction is best left to your tax attorney.
Home Office DeductionHome Office Deduction
Anyone who runs a business or works from home, whether they’re a renter or a homeowner, can claim a home office tax deduction. Currently, there are two ways to get this deduction. The more complicated way requires you to determine the percentage of your property used for commercial purposes. The other, easier way is to deduct $5 per square foot, for up to 300 feet, for your home office space.
However, be aware that this deduction is very tightly regulated by how a home office is defined. If you don’t do it right, this can raise a red flag with the IRS, leading to an audit. At a minimum, your home office needs to be a dedicated room only used for job-related activities. You can also claim tax write-offs on any office furniture or equipment, but this is more of a business expense than a home office deduction.
Standard DeductionStandard Deduction
When you first buy your home, you’ll have the option to opt for the standard deduction by the IRS. This will allow you to deduct a set amount of money from your taxable income. The only catch is that you can’t itemize your deductions. You can save money by itemizing any eligible deductions higher than the standard deduction amount.
Tax Benefits for Energy Efficiency UpgradesTax Benefits for Energy Efficiency Upgrades
The residential energy-efficient property credit allows you to deduct any energy-efficient device you purchased for a home, such as solar panels, wind turbines, or other upgrades. Before 2020, 30% of all expenditures for energy-efficient devices were deductible. However, it then went down to 26%, then 21%, and is currently at 10% of costs up to $500. Despite this drop in the deductible amount, it’s still a tax benefit that is worth taking advantage of.
Aging in Place DeductionsAging in Place Deductions
For homeowners in their golden years who aren’t planning for a transfer to a retirement home, you can claim deductions on any equipment or home upgrades that support your living conditions. For instance, a wheelchair ramp or grip bars throughout your home. This tax benefit also applies to any homeowner with disabilities or those who need specialized equipment for medical purposes.
Tax Benefits on Selling Your HomeTax Benefits on Selling Your Home
Anyone with plans to sell their home can use a considerable tax benefit. So long as you’ve resided in the home for two out of five years before the sale, you can claim deductions on any profit made in the sale for up to $500,000 if married and filing jointly or $250,000 if single. The gains you can make from this can be enough to give you the funds to purchase that “forever home” you’ve always dreamed of. This is a massive write-off and why it pays so well to get in early on the real estate game with a starter home that you can sell later down the line.
Final ThoughtsFinal Thoughts
Buying a home is a long-term investment; if you play your cards right, you can tap into some considerable tax benefits. Understanding the tax deductions you may be eligible for can save you thousands of dollars annually. However, before making any claims, it is vital that you first seek consultation from a qualified tax attorney. They do this for a living and may spot things you missed.