By Brandon Scott
We’ve all heard about the American dream, much of which centers around a house with some kind of fence. I don’t know about you but a white picket fence is not the look I am going for. However, the dream still remains tried and true. The enchantment of owning becomes more real as we become adults and you realize that no one just gives you a house. Rather, there’s a lot that goes into the process, namely saving.
Saving up for the downpayment and closing cost to purchase a home can feel difficult. Plus, owning a home comes with its own additional costs associated with having a home such as repairs and routine maintenance. Despite the cost, the value added of ownership versus the extra work is worth it as told by the wave of buyers entering the housing market.
To ease the burden of owning a home there are a few tax benefits you receive as a homeowner and, while these things may sound attractive to just dive into they may come with their own requirements and steps. It’s very important that you consult with your own tax professional to ensure you’re navigating the tax law successfully.
Leveraging Retirement Funds
Before buying a home you have the option to tap into the funds that you’ve set aside in your 401K and, or your IRA account. Both of these options will allow you to either take funds out or borrow against them. In the case of a 401K, you’re typically able to take out a loan against the 401K to use toward your down payment and closing cost. Taking money out from both accounts can be tax- and penalty- free as long as it’s done properly. Plus, you pay yourself back, typically, as a payroll deduction and, again, typically, at a lower interest rate than a personal loan or credit card.
Mortgage Credit Certificate (MCC)
In many states and jurisdictions, there are a host of mortgage credits that are available to first time home buyers. This credit permits the homeowner to take a tax credit based on a percentage of the mortgage interest paid in that year.
In DC, the local government provides a MCC, qualified borrowers have the ability to claim a Federal Tax Credit of 20% of the mortgage interest paid during each calendar year.
In Virginia, they provide a MCC for first-time homebuyers with a dollar-for-dollar credit toward their federal income tax. The credit is valid for the life of a mortgage, as long as you live in the home.
Finally, in Maryland, with a MCC a borrower can claim a federal income tax credit equal to a percentage of the “Certificate Credit Rate” of the interest paid during that tax year on a mortgage loan up to a maximum of $2,000 per year.
Mortgage Interest Deduction
When you own your home, one of the biggest tax breaks that you can take comes from deducting the interest you’ve paid on your mortgage. The tax code allows you to deduct the amount of mortgage interest you’ve paid when you file your taxes. Your mortgage lender tracks this information and sends it out in January.
Energy Efficient Improvements
The government incentivizes homeowners for making energy efficient improvements. When you make changes to your property that supports the environment, you will save 26% on qualifying new systems that use solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water or regulate the temperature in your home. The credit for fuel cell equipment is limited to $500 for each one-half kilowatt of capacity. It’s important to remember that the percentage savings may change, it’s expected that this credit drops to 23% in 2023 and it is currently scheduled to expire in 2024.
Of course, these tips are just the beginning. There are even more opportunities for you based on your home and your needs. Deduction for medically necessary improvements exists; however, there are requirements that you’ll have to meet. Or, deduct part of your home as rental for your office space, deducting state and local tax on your federal income tax and even deduction opportunities for individuals that faced a short sale or foreclosure. The name of the game is who you know not what you know, and leveraging professional relationships with lenders, CPA, and your trusted realtor gives you unlimited opportunity to find opportunities to help your bottomline.
Brandon Scott is a licensed real estate agent in Washington, DC, Maryland and Virginia. His license hangs with Keller Williams Capital Properties in DC. He’s been involved in the mortgage finance industry for the last 16 years in various fields. You can reach him by email at [email protected] Subscribe to his YouTube Channel at RealTeaDMV