When it comes to homeownership, the costs can be difficult to deal with. Maintenance and repairs — not to mention concerns about a possible drop in value — can make it hard for you to feel excited about your home. However, there are ways to get a tax benefit from your home. Here are 5 ways that your home can provide a tax benefit:
1. Mortgage Interest Tax Deduction
If you itemize your deductions (using Schedule A) you can gain a benefit from the interest you pay on your mortgage. This is a tax deduction, so that means that you won’t see a dollar for dollar reduction in your taxes, but you can offset some of your income.
Watch out, though: there are phaseouts associated with this tax deduction. Make sure you qualify for the deduction and understand the limitations associated with it.
2. Property Tax Deduction
Many homeowners don’t realize that there is a way to reduce their federal taxes by claiming a deduction for what is paid in state and local property taxes. These little-known tax deductions can help you reduce your income (and your tax bill).
Of course, you need to make sure that you qualify for the deduction. As with so many tax benefits associated with our tax code, there are restrictions and requirements. However, if you are frustrated with your property tax bill, take the time to see whether or not you are eligible for a property tax deduction.
3. Using a Trust
One way to protect your home from estate taxes and other transfer-type problems is to use a trust. In fact, one of the ways that the wealthy use trusts are for estate planning purposes. It’s possible to put almost any asset in a trust, including your home. There are advantages to including your home in a trust, and those benefits include tax benefits. However, you also have to be aware of the fact that there are downsides as well. In some cases, depending on the laws governing a state, you might have a tax consequence right now. So, you might spare your family some estate tax issues, but have your own current tax situation.
4. Rental Property
If you decide to rent your home instead of selling it, or if you decide to use your vacation home or a second home as a rental, you might be able to reap some tax benefits.
Before you get too excited, though, it’s vital that you understand which rental expenses are tax-deductible. You also need to know the rules governing whether or not your vacation home can be considered a rental property. The fact that you sometimes use it for yourself can reduce your ability to claim rental-related deductions. It’s a good idea to consult with an accountant or another type of tax professional who can help you work out the ins and outs of what to expect when you decide to turn your home into a rental property.
5. Give Your Home to Charity
Finally, don’t forget that you can give your home to charity in order to reap a tax benefit. There are different ways to benefit, and one of them is to promise your home to charity — but still live the rest of your life in the home. You get an upfront deduction and still get to say in your home. There are other arrangements that can be made as well. Consider your options and consult with a knowledgeable professional to see what possibilities are offered.