Unlocking Tax Benefits of Homeownership

Tax law tends to encourage home ownership through credits, deductions and potential for tax-free income. It can be a real reason people choose to buy and sell. Over time the increase in value from a home could be worth more than dollars earned which are in fact taxable, and the ongoing cost of ownership can be decreased through accurately tracking and categorizing those costs when reporting to the government. Each story, of course, has its own complexity. Should you have a specific question or would like an analysis of your situation, please reach out to our team.

Credits

There are significant benefits the U.S. government offers to support home repairs which efficiently use or save energy and for the installation of renewable energy sources in a home. Up to 30% of these investments can directly offset taxes owed - they are dollar for dollar savings. Insulation, external doors, electric car charging station, efficient water heaters and solar panels are examples. A full and simple list, along with the amount which can be turned into benefit, is laid out here.

Deductions

Some of the most significant expenses of home ownership - mortgage and interest and state taxes - can also be recovered.  These expenses become relevant and start offsetting money made through a job or small business, for example, once they reach a certain amount.  For an individual taxpayer, once mortgage interest, state taxes and other personal items such as charitable gifts and out-of-pocket health expenses exceed $16,000 they begin directly lowering the amount of income on which tax is due.   For a couple filing together, the number is $32,000.

Small Business

Should the owner of a small business use a portion of their home’s square footage for that business, significant investments such as painting, furniture or even repairs on that area can be used fully to offset income, and a portion of the costs (e.g. insurance) to maintain the home as a whole.  The challenge is accurately documenting these numbers throughout the year, and determining what portion of the home really relates to the business. The IRS offers a simplified method; however, it limits the amount of expense which qualifies to $1,500.

New Hampshire Transfer Tax 

At the state level, New Hampshire taxes home sales, based on the size of transaction. Considering the absence of an income tax like most other states, this transfer tax and relatively high property tax seek to balance the budget. The cost is straightforward and has very few exceptions: $0.75 for each $100 of price. This is charged to both the buyer and seller and is normally considered part of closing costs. 

Income, free of tax

As a house increases in value so does the possibility of one day generating income - of making money. What's unique about this income is the federal government does not ask for a portion nor even that it be reported to them.  $250,000 of profit is the limit, or if reporting taxes as a couple, the profit can be up to $500,000.  Exceptions to this rule simply distinguish between investors and home owners. Should the home be the primary residence, and the seller was both owner and resident for at least two out of the five years prior to sale, the income is free of tax and does not need to be included on a tax return.  

While only an overview of some parts of the tax code which are meaningful in regards to home ownership, we hope it can aid in beginning the tax preparation process or simply as a point of reflection if considering buying or selling a home. 

Sources: U.S. and NH departments of revenue