There are many tax benefits that people who own homes can reap. One of the main tax benefits of homeownership is that they don’t have to count the rental value of their home as taxable income—also called imputed rent. This means that their home can be a source of income that is not taxed. Here are some more tax benefits that homeowners get:
Mortgage Interest Deduction.
Homeowners who itemize deductions can reduce their taxable income by deducting the interest they pay on a home mortgage. Taxpayers who don’t own homes don’t have this benefit. This tax break was further defined by the Tax Cuts and Jobs Act.
Property Tax Deduction.
These homeowners can also reduce their taxable income when they deduct their property taxes, as this will effectively be a transfer of federal funds to jurisdictions that impose a property tax, which lets them raise property tax revenue at a lower cost to their constituents.
Profits From Home Sales.
Generally speaking, when a taxpayer sells an asset, they must pay capital gains tax on any profits, but homeowners may exclude from taxable income up to $250,000 (or $500,000 for joint filers.) if they meet the criteria as follows:
- They must have owned and occupied the home for 2 years of the preceding 5 years as a primary residence.
- They may not have claimed the capital gains exclusion in the past two years for the sale of another home, with some exceptions.
These deductions and exclusions are generally worth more to taxpayers in higher tax brackets. Compared to homeowners in lower-income tax brackets, those with higher incomes face higher marginal tax rates and pay more property tax and mortgage interest. This means that they will most likely itemize their tax deductions on their tax returns.