What are the tax benefits of homeownership?

People who own their homes benefit from a number of provisions in the tax code. The primary advantage is that the owners are exempt from paying taxes on the imputed rental revenue from their own residences. They are exempt from reporting the rental value of their residences as taxable income, despite the fact that it is just as much of a return on investment as stock dividends or savings account interest. It is a non-taxable source of income.

If homeowners itemize their deductions, they can deduct both mortgage interest and property tax payments, as well as certain other expenses, from their federal income tax. All income would be taxable and all costs of obtaining that money would be deductible in a well-functioning income tax. As a result, there should be deductions for mortgage interest and property taxes in a well-functioning income tax. However, because our existing system does not tax homeowners’ imputed rental income, the reason for deducting the costs of obtaining such income is unclear.

Finally, homeowners can deduct the capital gain from the sale of their home up to a certain amount. All of these advantages are worth more to higher-income taxpayers than to lower-income taxpayers.
What are the tax advantages of owning a home?
Interest on a mortgage loan is deductible. One of the most significant tax benefits is the reduction in your mortgage payment. …
Premiums for mortgage insurance…. Points and other closing charges…. Property taxes.
Expenses for a home office
Moving expenditures. Accidental loss. Second residences/vacation homes.

IMPUTED RENT

Purchasing a home is an investment, with one of the benefits being the ability to live in the home without paying rent. Unlike returns on other investments, the return on homeownership—also known as “imputed rent” by economists—is not taxed. Landlords, on the other hand, must report the rent they receive as income, and renters cannot deduct the rent they pay. A homeowner serves as both a landlord and a tenant, but the tax code treats homeowners like renters while ignoring their dual roles as landlords. The Office of Tax Analysis (OTA) at the US Department of the Treasury estimates that the exclusion of imputed rent reduced government income by roughly $121.3 billion in fiscal year 2019.

MORTGAGE INTEREST DEDUCTION

The interest paid on a home mortgage can be deducted by homeowners who itemize deductions, lowering their taxable income. Interest paid on debt incurred to purchase goods and services is not deductible for taxpayers who do not own their residences.

This important tax deduction for homeowners was reduced by the Tax Cuts and Jobs Act (TCJA). Prior to the TCJA, the interest deduction was restricted to up to $1 million in debt incurred to purchase or significantly renovate a home. Homeowners could also deduct interest on up to $100,000 in home equity debt, regardless of how the funds were used. The TCJA limited the interest deduction to up to $750,000 of mortgage debt incurred after December 14, 2017 to purchase or upgrade a primary or secondary residence.

In fiscal year 2019, the OTA predicts that the mortgage interest deduction cost $25.1 billion. Prior to the TCJA, OTA predicted that the cost of the mortgage interest deduction in fiscal year 2018 would be $74.5 billion. Other features of the TCJA resulted in many fewer taxpayers itemizing their deductions, and the reduced cap on deductible mortgage interest played a tiny role in lowering the anticipated cost. According to the Urban-Brookings Tax Policy Center, only around 8% of tax units benefited from the deduction in 2018, down from about 20% in 2017, before the TCJA.

PROPERTY TAX DEDUCTION

Homeowners who itemize deductions can lower their taxable income by deducting the property taxes they pay. That deduction essentially transfers federal monies to jurisdictions that levy a property tax (primarily local governments, but also some state governments), allowing them to raise revenue at a lesser cost to their people. In fiscal year 2019, the OTA estimates that the deduction saved millions of homeowners a total of $6 billion in income tax. The cost of the deduction decreased dramatically as a result of the TCJA, as fewer homeowners itemized and the TCJA imposed a $10,000 cap on the amount of state and local taxes that taxpayers can deduct.

PROFITS FROM HOME SALES

Generally, taxpayers who sell assets must pay capital gains tax on any profits received from the transaction. However, homeowners can deduct up to $250,000 ($500,000 for joint filers) of capital gains on the sale of their homes from their taxable income if they meet certain requirements: they must have lived in the home as their primary residence for two of the previous five years, and they generally cannot have claimed the capital gains exclusion for the sale of another home in the previous two years. In fiscal year 2019, the OTA estimates that the exclusion provision saved homeowners $43.6 billion in income tax.

EFFECT OF DEDUCTIONS AND EXCLUSIONS

Taxpayers in higher tax brackets benefit more from the deductions and exclusions available to homeowners than those in lower levels. For example, a taxpayer in the 37 percent top tax bracket saves $740 by deducting $2,000 in property taxes paid, whereas a taxpayer in the 22 percent bracket saves only $440. Furthermore, although accounting for only around 26% of all tax units, those earning $100,000 or more earned over 90% of the tax advantages from the mortgage interest deduction in 2018. That distinction

This is due to three factors: higher-income homeowners have higher marginal tax rates, pay more mortgage interest and property tax, and are more likely to itemize deductions on their tax returns than lower-income homeowners.