Lightening The Burden: Leveraging The Tax Benefits of Home Ownership

The red-hot sellers' market that prevailed post pandemic cooled off last year after sharply rising mortgage rates spooked many prospective homeowners. Amid the on-again-off-again warning sirens of a recession, aspiring homebuyers may be easily confused about whether now is the time to buy their first home. Amid all the other mixed-up economic indicators, clouds of uncertainty are still hanging over the housing market.

As of February 9, the average 30-year fixed-rate mortgage averaged 6.12%, according to Freddie Mac. While that is a mild decrease from January levels, overall rates are still much higher than they were a year ago – 3.69%.

Prices have responded in kind to the ease in demand. Data from reveals median house prices in the US came down by December 2022 to around US$400,000, about $50,000 less than its mid-year high point, yet still higher than 2021's median price.

Yet there is a silver lining – those paying more now in interest on their mortgages are eligible to pay less come tax time. What are the tax benefits of homeownership? Find out how to get started in real estate, and get expert advice to consider on mortgage interest deductions.

Tax Burden

There are several tax deductions that homeowners can take advantage of.

First, homeowners can typically deduct some or all of their property tax (state or local) from their federal income taxes. This is provided they use the property personally (commercial or rental usage is not deductible).

For those who do work at their residence, there is also the home office deduction. This unlocks a proportional tax deduction (calculated by the square footage of the workspace) of their property-related expenses. Note only self-employed freelancers or small business owners qualify, not company employees. This deduction is also available to renters. However, landlords may restrict the dual use of their rental space, making ownership optimal for home-bound work over the long term.

Tax benefits also apply not only to the residence but also to the mortgage.

Interesting Deductions

“The home mortgage interest deduction is a tax benefit available to homeowners who have paid interest on their mortgage,” says Spenser Liszt, CFP and financial planner at Paradigm Advisors.

“Maximizing the mortgage interest deduction is all about proper planning and understanding the eligibility criteria. Homeowners can consider itemizing their deductions, choosing the right mortgage loan, and keeping accurate records of mortgage payments to maximize their mortgage interest deduction and lower their tax bill.”

Liszt explains the total tax deductible is based on the first $750,000 of mortgage debt, while it is $350,000 for those who are married and filing separately.

“If the loan was taken out after December 16, 2017,” he adds. “For loans taken out prior to this date, the deduction limit increases to $1,000,000 ($500,000 for those who are married filing separately).”

Liszt notes this is only available as an itemized deduction.

“This means that in order to take advantage of this deduction, a taxpayer's itemized deductions must exceed the standard deduction,” he adds. “For the year 2022, the standard deduction is set at $25,900 for joint filers, $12,950 for single filers, or $19,400 for heads of household. If a taxpayer's itemized deductions do not exceed the standard deduction, they cannot claim the home mortgage interest deduction.”

Starting With Zero

Skyrocketing prices have left many Americans shut out of the real estate game, yet there are low-cost strategies available. For those who can't afford to own a home outright, real estate crowdfunding offers an alternative. This is where several investors pool their capital together to buy a stake n investment property.

Crowdfunding takes minimal investment, and experts can buy, manage, and sell properties on behalf of the group.

There are many crowdfunding sites, such as RealtyMogul and Roofstock. First-time investors can start with as little as $500 or up to $10,000. These platforms make realty investing more like a passive form of income and reduce the amount of time you need to spend managing the property.

For cash-strapped investors who want to own their property outright, there are a number of ways to get started in real estate with less money.

House hacking, for instance, leverages tenants to offset the cost of a mortgage. Once a multi-home property is purchased (duplex, triplex, or quadplex), a first-time homeowner can rent out while also living on-site. This rental income can then pay to go toward paying off the mortgage and generating net positive cash flow.

Don't have enough saved up for a 20% deposit on a home loan? Try getting a loan from the Federal Housing Administration (FHA) from the Department of Housing and Urban Development (HUD), through which first-time home buyers can pay a down payment of 3.5%.

Real estate investing can be daunting, but with the right strategy and financial discipline, newcomers can enjoy the benefits of home ownership and some extra tax deductions to boot.

This article was produced and syndicated by Wealth of Geeks.