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Tax Benefits Of Buying And Owning A Home In 2021: Complete Guide And FAQs

Jamie Johnson4-minute read

April 14, 2021

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Many people dream of owning their own home for the stability and peace of mind that comes with it. But you may not realize that there are also many tax benefits of owning a house. The money you can save with these tax breaks could save you thousands of dollars over the life of the loan.

But in 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, and it brought significant changes to the types of deductions homeowners can take advantage of. Let’s look more closely at what these changes are, and how they will likely affect current homeowners.

What Were The Tax Benefits Of Owning A Home Before 2017?

U.S. policies have consistently favored homeownership as the bedrock of the American dream. In the past, this has always translated to significant tax breaks for homeowners over renters. Let’s look at the two main benefits of homeownership before 2017.

Mortgage Interest Deduction

The mortgage interest deduction allows you to deduct any interest paid on your mortgage. This deduction also included any interest paid on home equity loans and home equity lines of credit (HELOCs.)

Property Tax Deduction

All state and local property taxes used to be fully tax-deductible. However, the TCJA capped these deductions at $10,000, which is disadvantageous for homeowners in high-tax states.

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How Has The 2017 Tax Cuts And Jobs Act Changed The Tax Benefits Of Owning A Home?

TCJA included the following major changes that affect homeowners.

Changes To The Mortgage Interest Deduction

Homeowners can still benefit from the mortgage interest deduction, but it was capped by the TCJA. If you’re an individual taxpayer or married couple filing a joint return, you can claim the interest paid on up to a $750,000 mortgage.

For married couples filing separately, the limit is capped at $375,000 for homes purchased after 2017. And the TCJA eliminated all deductions for home equity loans unless the home equity loan is used for capital improvements to the house.

Changes To The Standard Deduction

Another thing the TCJA did was to double the standard deduction. This change means that most taxpayers don’t need to itemize their deductions to enjoy the mortgage and property tax deductions. Current taxpayers may actually enjoy a greater tax benefit than they did from the previously taken deductions.

Changes To SALT Deductions 

Homeowners also enjoy a deduction for state and local taxes (SALT). The TCJA put a $10,000 cap on SALT deductions for single taxpayers and married couples filing jointly. This change hurts taxpayers that live in states with high property taxes like New York, New Jersey, California, and Massachusetts.

Are Closing Costs Still Tax Deductible?

For the most part, the only closing costs that are tax-deductible are your home mortgage interest and specific real estate taxes. You can deduct these for the previous year if you itemize your taxes.

Can I Still Deduct PMI Or MIP?

The TCJA extended this tax deduction through 2020, so taxpayers can deduct their private mortgage insurance (PMI) or mortgage insurance premiums (MIP) on their 2020 tax returns. But without Congressional action, the future of this deduction is unclear.

Are There Other Home-Related Deductions I Can Take?

Homeowners continue to benefit from other tax deductions that were left unchanged by the TCJA. If you itemize your deductions, self-employed individuals can add a home office deduction.

And you can also benefit from tax credits for energy-efficiency improvements. A tax deduction lowers your taxable income, while a tax credit reduces your taxes and often leads to a larger refund.

Is There A Tax Benefit To Owning A Home, Post 2017 TCJA?

Considering some of the changes imposed by the TCJA, is it still worthwhile to purchase a home in 2021? The answer to that question is a resounding yes – the wealth accumulation and capital gains exemption means that homeownership is still a worthwhile endeavor.

Wealth Accumulation

Every time you make a mortgage payment, you’re building equity in your home. This equity grows untaxed during the entire period when you own your home.

In comparison, renters don’t have the option to build any equity. Depending on your situation, renting for a period of time may be the right choice, but you’ll miss out on the wealth-building opportunities homeownership provides.

The Capital Gains Exemption When You Sell

While you may not receive the same tax advantages you would have received prior to 2017, homeownership is still an important way to accumulate wealth. You do this in the form of untaxed equity that you build in your home. And homeowners get to enjoy the exemptions to the capital gains tax when they sell their primary residence.

How Does The TCJA Affect Investment Property Deductions?

The TCJA does nothing to alter the rules of rental property deductions. In fact, most landlords benefitted from the passage of the TCJA. The law lowered the individual tax rates landlords pay on their rental properties, and you can deduct any personal property used in your rental businesses.

The Bottom Line: Homeownership Is Still An Important Source Of Wealth Accumulation

The TCJA of 2017 did make some changes to the mortgage interest deduction and the property tax deduction. If you live in a state with a high property tax, like New York or New Jersey, these changes may negatively impact you.

 

But homeownership is still a valuable way to build wealth in 2021. And there are still many tax benefits of buying a house. If you’re interested in purchasing a home in the next year, you may benefit from learning more about the advantages of homeownership.

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Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider, and Bankrate.