Tax season might be over this year, but it’s never too early to start thinking about how events in your life now may affect your tax benefits for next year. Purchasing a home is arguably one of the biggest financial decisions in one’s life. It’s also one that is known to potentially come along with multiple tax breaks. We’re breaking down a few of these potential benefits, along with changes under the recent tax reform, that you should familiarize yourself with before buying a new condo in Maui or putting your Kailua home for sale.
Aside from the obvious gains of mere pride and joy that come with owning your own property, home ownership can offer multiple financial benefits, such as home tax deductions, tax credits and other breaks that shouldn’t be overlooked. If you plan to purchase a new home in Hawaii this year, it would be wise to familiarize yourself with current tax laws, as they have undergone changes in the past few years, which may affect how that house purchase benefits you.
As a recap, the federal Tax Cuts and Jobs Act (TCJA) underwent a significant tax reform, which Congress enacted in December 2017 and is currently scheduled to go through December 2025. Below we have broken down a few of the tax benefits that you may receive if becoming a first-time homeowner this year, as well as changes implemented by the new TCJA that you should be aware of if buying or selling a home for the first time since January 2018.
Mortgage Interest Deduction
One of the biggest benefits of owning a home is the fact that mortgage interest expenses are deductible. Under the TCJA, homeowners can deduct the interest you pay on a loan on up to $750,000 from your income taxes. Although this limit used to be $1 million (the TCJA reduced the limit and made modifications on how a home equity line of credit could be used), this benefit should not be overlooked. This deduction could still provide you with massive returns come tax season next year. Homeowners with new loans could especially benefit from this, as interest charges on mortgages are normally higher in the beginning of the mortgage’s term.
Homeowners should keep in mind that this tax deduction limit only applies to those who itemize their personal deductions. For those that choose not to itemize deductions, the standard deduction for individuals or married couples filing individually is $12,000, if you’re the head of household it’s $18,000, and for those married filing jointly it’s $24,000. It is worth speaking with a financial advisor to determine which method of filing is ultimately most beneficial for you.
Tax-free Capital Appreciation
One benefit that is going unchanged even with the TCJA is the capital gains you receive tax-free after the sale of your home. Homes appreciate in value during the life of your ownership, so when it is time to part ways with that condo in Honolulu you’ve lived in for years to move to a home in Kailua, you can relish in the profits of your sold home without worrying about being taxed. Under the TCJA married homeowners can retain up to $500,000 in home appreciation profits from the sale of their home, or $250,000 for single filers. There is a catch, though. You have to have used your home as your primary residence for at least two years out of the five years before the sale date to qualify for this exclusion.
Property Tax Deductions
Another tax benefit from being a homeowner is the ability to be able to deduct portions of your property taxes. Although prior to the TCJA you could deduct the entirety of your property taxes, all is not lost, as you are still able to deduct up to $10,000 ($5,000 if married filing separately) under the new law. Under the TCJA, the deduction was changed from solely property taxes to a combination of property taxes and either state and local income taxes or sales taxes under the $10,000 limit.
While being a homeowner in 2019 offers a variety of tax benefits, with the overhaul of tax laws in the past few years, it is wise to evaluate your choices to determine what is best for you and your family. It is worth noting, as well, that many of these recent changes may end in 2025, so it’s always good to be knowledgeable about how tax changes could affect your returns. Whether looking for a new Honolulu condo or thinking of putting your Kailua home for sale, we would love to help you with whatever Oahu real estate needs you may have. Please do not hesitate to give us a call here at Hawaii Realty International!