Tax reform has been a hot topic in the news for months, but with the latest tax rules now signed into law, many homeowners and home buyers are curious about the new tax benefits of home ownership. Read on to learn more about how home ownership affects your taxes and get the 411 on the new tax law.
Mortgage Interest Deduction
Historically, the standard mortgage deduction allowed homeowners to deduct their mortgage interest from their taxable income. For most homeowners, especially those who have recently purchased a home, interest is the largest portion of the mortgage payment, making this is quite a large tax deduction. While the new tax law preserves the mortgage interest deduction, it has some limitations for homeowners with more expensive homes. While previously, homeowners could deduct the interest of the first $1 million of mortgage debt, the new rules cap the mortgage interest deduction on the first $750,000 of mortgage debt. This new cap also applies to mortgages on second homes. Current homeowners who purchased homes before the new tax laws are not affected by the downsized mortgage interest deduction.
Property Tax Deductions
Prior tax law also allowed homeowners to deduct their state and local property taxes to help reduce their tax liability. The new law limits this deduction to $10,000 for individuals, which is still a great deal for homeowners.
Closing Cost Deductions
The new law left closing cost deductions unchanged. Specifically, home buyers may qualify for a tax deduction for the year of the home purchase based on the closing costs required to purchase the home. During the first year of home ownership, buyers can claim the origination fees or points on the loan, regardless of whether the buyer or the seller pays them. This can mean considerable tax savings for the first year after a home purchase.
The Mortgage Credit Certificate
The NC Housing Finance Agency administers the Mortgage Credit Certificate, which enables eligible first-time buyers and veterans to save up to $2,000 per year on their federal taxes for the life of the mortgage loan. Qualified buyers can claim a federal credit for 30 percent of the interest for an existing home or 50 percent on a new construction home. The new tax law preserves the mortgage credit certificate, so North Carolinians can continue to qualify for this tax-saving certificate.
Home Sellers Get a Tax Break, Too
One of the large debates for the tax reform centered around capital gains taxes for those who sell their homes. Homeowners who sell their home are able to exclude $250,000 for singles and $500,000 for joint taxpayers from capital gains when they sell their primary home. However, this rule only applies for those who have lived in the home as their primary residence for two out of the last five years. This exclusion makes it easier for homeowners to use the appreciated value of their home to move up to a new house in the future.
When it comes to tax time, owning a home is a great way to keep more money in your pocket and perhaps even maximize a refund. The NC Housing Finance Agency offers many ways to help make home ownership happen for North Carolinians. Learn more at www.nchfa.com/home-buyers.