Tax considerations have long been an important part of homeownership. And that’s largely thanks to the various tax benefits designed to encourage home ownership among taxpayers. In fact, home buyers often consider potential tax benefits when they decide to purchase a home.
The Tax Cuts and Jobs Act of 2017 changed many of the rules of the game, however. Here’s what you need to know about homeownership and paying taxes in 2021.
You may no longer need to itemize your deductions.
That may seem ludicrous to those who have deducted home mortgage interest and property taxes for years. Or maybe you were considering buying a house with the expectation of taking itemized deductions as an important part of the decision to do so. But most taxpayers in 2021 will not need to itemize their deductions, which is due to the increased standard deductions.
That doesn’t mean you’re not getting the benefit of a deduction or that your taxes will go up. In fact, if your standard deduction is now larger than your previous total itemized deductions, you shouldn’t think of it as “losing” a deduction at all. You’re just getting a larger standard deduction instead.
Real estate taxes are limited.
State and local income taxes (SALT) paid in 2021 are limited to a $10,000 deduction. Real estate taxes paid on your home or second home are included in the total SALT deduction along with any state and local income taxes, sales taxes, and personal property taxes. For taxpayers in high tax states, that’s a significant limitation .
The cap is $10,000 for every return, whether you file as Single or Married Filing Jointly, or with another filing status. The only filing status with a different limit is Married Filing Separately, which has a cap of $5,000.
You can choose the Simplified Method for home office expenses.
If you own your own business and have a dedicated space in your home, the Internal Revenue Service (IRS) allows you to take a deduction for an office in your home without all the pain of adding up and allocating expenses, like utility bills, rent or mortgage interest, and depreciation, to your home office space. Instead, you can just enter the square footage of your qualifying home office space, and take a deduction worth $5 per square foot on up to 300 square feet, for a maximum deduction of $1,500. That’s called the Simplified Method.
You can still calculate your home office deduction as actual expenses if you want. You may get a larger tax deduction by doing so, especially if your home office area is larger than 300 square feet. In that case, you can claim whichever amount is larger.
Your HELOC interest may no longer be deductible.
You can deduct interest on your home equity loan (HELOC) if you used the proceeds to buy, build, or substantially improve your home. There is no grandfathered provision. If you already have a HELOC that you used for other purposes you cannot deduct the interest under the new tax law.
If you did use your HELOC to buy, build, or substantially improve your home, however, you can still deduct the interest on up to $100,000 of equity debt.
Mortgage interest may be limited.
Home mortgage interest is generally deductible as an itemized deduction but it may be limited if your total mortgage debt exceeds $1,000,000 (or $750,000 for homes purchased after December 15, 2017). To residents of most states, that may seem like a huge amount of money. However, in some parts of the country, $1 million buys a rather standard home. The limitation on mortgage interest deductions can be significant for buyers in those markets.
Refinancing a home with a cash-out deal won’t automatically make the interest deductible anymore, either, due to new limitations.
The capital gains exclusion on the sale of your home.
You can exclude up to $250,000 ($500,000 if filing jointly) of gain from the sale of your house if you owned and lived in the home for two of the last five years, and you meet other qualifications.