Mortgage tax deductions and other homeowner benefits

By Casey Nealon | Citizens Staff

There are obvious pluses to homeownership: You don’t have to get your landlord’s permission to have a pet; you can paint the walls; and you can finally have a little privacy. But there are financial benefits, too — possibly more than you know. With such an investment as a home, you need to be aware of every advantage available to you including the mortgage interest deduction.

This article is going to help you when April 15 comes around. As is the nature of taxes, there is more beneath the surface. This rundown of mortgage tax deductions doesn't cover everything, so it's imperative that you consult a tax professional about any questions or clarifications.

What is the mortgage interest tax deduction?

In the early years of mortgage payments, much of the money you spend goes toward interest on the loan. This won’t always be the case (as your principal balance goes down, so will the amount of interest you owe), but it is the nature of most mortgage agreements to be spending more on interest than principal at first.

But here’s the silver lining of mortgage interest: The interest on up to $750,000 of your purchase mortgage could be tax deductible. This cap was put in place at the end of 2017, but a purchase mortgage that predates that has a limit of $1 million.¹

How to claim the mortgage tax deduction

Start with Form 1098 from your mortgage servicer, which shows how much you’ve paid in interest this year. Then, when you’re filing your taxes, you’ll have the option to select the standard deduction or to itemize your deductions. Here’s the difference: A standard deduction is a flat-rate number based on your filing status ($13,850 for single/married filing separately, $27,700 for joint filers, and $20,800 for heads of household).² This amount is subtracted from your total taxable income.

There’s a little more legwork involved in itemizing your deductions, and keeping detailed records throughout the year will certainly come in handy here. You have to add up every tax-deductible expense you’ve made this year. These include interest paid on your purchase mortgage, but there are more deductible expenses to note.

Other deductible expenses include charitable donations, unreimbursed (i.e., out-of-pocket) medical or dental expenses, and state and local taxes. There are also tax deductions for certain home improvements, such as remodeling for medical care like wheelchair ramps or handrails and installing energy-saving equipment like solar panels. If your home is the principal location of your business, then you can deduct related home office expenses, such as insurance, utilities, maintenance, and repairs.³

The total amount will be deducted from your taxable income. If the total is less than the standard deduction amount, you should stick with the flat-rate and not itemize. If the total is more than the standard deduction amount, then good news! You’ve saved a little extra by having less taxable income.

What counts as mortgage interest?

No two situations are identical, so you might be wondering if there’s a hidden exception somewhere in here. Let’s run through the differences between what’s tax deductible and what’s not:

What's tax deductible?

All interest paid to purchase your first or second home — whether it’s a co-op, apartment, condo, mobile home — is qualified as long as it’s the collateral on your mortgage. It also needs to have sleeping, cooking, and bathroom facilities. You can still deduct interest paid from nontaxable housing allowances from the military or ministry. You can deduct the payment of mortgage points in the year you purchase them (mortgage points are like pre-paid interest; you pay them once during closing to get a discount on interest later), late payment charges on your mortgage and prepayment penalties. You can also deduct state and local property taxes.¹

What isn't deductible?

Just to cover our bases, here are some things that are not tax deductible:

• Homeowner's insurance
• Extra principal payments
• Title insurance
• Settlement costs
• Mortgage insurance premiums

As is the nature of taxes, there’s more beneath the surface. This rundown of mortgage tax deductions doesn’t cover everything, so it’s imperative that you consult a tax professional about any questions or clarifications.

Other benefits of homeownership

Equity

One of the key reasons to buy a home is to build equity. Instead of paying rent to a landlord to borrow their property, you’re buying a home little by little through a mortgage. But what exactly can you do with equity? It contributes to your net worth and is yours to use through home equity loans. This means you are borrowing from yourself — the money you’ve spent toward your principal on your mortgage can be reclaimed. Cash-out refinancing or a home equity line of credit can give you some liquidity to spend for home improvements (which could contribute to the overall value of the home) and other important things on your list.

Credit

Diligent payments on a mortgage will do wonders for your credit score. Yes, you’ve already put it to the test when buying the home, but good credit is still a must going forward. For example, other big purchases (like a car loan) and insurance for just about anything will be based on your credit score, but you can also pay off your mortgage sooner if you stay watchful. If you have a fixed rate, watch to see if the interest rates get any lower than yours. If they do, then you might consider refinancing your mortgage. If you have good credit, you can walk away with a lower fixed rate and pay less on interest (which means more of your mortgage payment goes to your principal).

Appreciation

Any renter knows the sinking feeling that comes when your rent increases. This might happen during times of high inflation, or it might happen as the building appreciates. But when you’ve bought your home, appreciation happens in your favor. Even though the building is technically decreasing in value the more you live in it (just like a car that loses value as soon as you drive it out of the parking lot), oftentimes the land is becoming more valuable because of everything happening around it (the community improves, a nice new store opens down the street, the roads and infrastructure get worked on, etc.).

Because of appreciation, you might find that the value of your house increases over the years. This is especially great if you ever decide to move on and sell the home. Or, if you want to keep it around as a rental property, appreciation could allow you to charge a higher rent.

At the end of the day, the important part is to enjoy your home. It’s a big responsibility to take care of and pay for it, but there’s always help to be found at Citizens if you need it — whether you’re in the market for a home or have been settled down for decades. If you would like to learn more or get some personal advice from a professional, please visit our mortgage page or call 855-422-6548.