Tax Breaks for Homeowners: What Your Clients Should Know

Buying a home is a historical rite of passage, and for many a safe, secure, and often profitable way to invest their life savings.

Many of the actual benefits of homeownership become evident around tax time. But while the market continues to grow, with property values and rent at an all-time high, there are still a number of considerations for homeowners that taxpayers should be made aware of before they commit.

With recent changes to the tax code and the implementation of the Tax Cuts & Jobs Act for the 2018 fiscal year, it’s now more important than ever that tax professionals remain up-to-date on significant tax breaks.

IMPUTED RENTAL INCOME

One of the lesser understood benefits is that homeowners are not required to pay tax on imputed rental income.

Imputed rental income is essentially a tax-free return on your property investment.

Consider for a moment that if you buy a house and rent it out to someone, you can collect rent which will be considered taxable income.

However, if you later decide to live at the property, you’re effectively paying your own rent to yourself as a landlord.

Since you are still technically a landlord, and your property needs to collect rent, the U.S. has determined that this ‘income’ is nontaxable. You’re effectively making rent payments (to yourself) which you aren’t required to pay tax on.

Confusing? Perhaps, but a worthwhile consideration for property owners looking to lower their taxable income.

MORTGAGE INTEREST DEDUCTIONS

Taxable income can be reduced for homeowners who itemize their deductions and then deduct the interest paid on their home mortgage.

This interest is on any debt which is incurred to purchase or substantially renovate a home. However, there are limits to the amount of interest paid that can be deducted, and many of these have changed under the Tax Cuts & Jobs Act. For example, historically the threshold was set at 1 million dollars for single filers but under the new tax law for 2018, this has been reduced to $750,000 for single filer status returns.

It’s important to understand the basic changes to these limits and communicate with your clients ahead of time. Additionally, there are online resources that delve into tax reform news that will certainly help clarify any questions.

PROPERTY TAXES

Any type of tax reduction is a good thing, but it’s important to understand the implications and how it’s likely to affect homeowners in the long-term.

Essentially, state and local property taxes are deductible from federal taxable income. This is to allow state governments to increase local property taxes gradually—to keep it financially affordable for their constituents.

So, while it may seem that homeowners have a safe and secure deduction to rely on, what they need to remember is that it’s likely to change over time. For example, the Tax Cuts & Jobs Act has placed new limits on what property taxes you can claim for 2018. All of these changes are important information for clients to understand so they can think about how these new rules may affect their financial situation come tax season.

PROFIT ON CAPITAL GAINS

Being that it is often the largest deduction, a home is a unique asset as it is exempt from capital gains taxes (in most cases).

A homeowner may deduct the capital gains they receive from the sale of the home if they meet certain criteria. As a tax professional, it’s important that your clients are aware that they must have maintained the home as a principal residence for two of the previous five years.

Also, they must not have claimed the capital gains deduction from the sale of a previous home within a two-year period. If they do meet the above criteria, they may qualify for up to $250,000 worth of deductions on their taxable income for single filer status.

BE PREPARED

As a tax professional, be sure to familiarize yourself with changing tax laws to ensure that your clients are fully prepared for the 2018 tax season. Make sure you’re up-to-date on the latest news and have an understanding of the most significant tax breaks that are available to your clients.