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It is quite likely for your own home to represent your largest financial commitment. As such, the Federal Government has structured the tax code to encourage homeownership as a central pillar to wealth creation. Become familiar with basic tax legislation and paperwork, so that you may best maximize free cash flow.

Residential Real Estate

For first and second homes, you may itemize mortgage interest and property taxes paid deductions to lower your taxable income. In 2018, the Federal Government limited total state, local (SALT) and property tax deductions to $10,000.

The SALT deduction cap has been especially problematic for residents in notoriously high tax municipalities, like California, Illinois, and the Northeast megalopolis; and further drives the ongoing stampede into Sun Belt states like Arizona, Florida, and Texas.

Self-employed filers might also deduct home office expenses away from their respective business incomes. These deductions pro-rate mortgage interest, insurance, and property taxes according to the proportion of space used exclusively for business. A home office can only be deducted against current business income. Here, any losses will result in carryforwards to be deducted in subsequent years.   

Rental Real Estate

IRS Schedule E classifies some additional rental real estate expenses as advertising, auto and travel, cleaning and maintenance, repairs, supplies, utilities, and depreciation.

Depreciation is especially important as a non-cash expense because you may write off the value of the building through the course of its 27.5-year useful life. Lenders, however, will judge real estate losses harshly. Aggressive write-offs may prohibit you from securing additional mortgages to build your portfolio.

Consider holding your rental real estate within a limited liability corporation (LLC). As the name would imply, the LLC will shield the rest of your personal assets away from litigation. LLCs are pass through entities and only taxed once.  

Additional Considerations

You will reference Schedule A, Schedule E, Form 1040, and Form 1098 to account for real estate and pay income taxes. Still, in many cases, it will be more economical to simply take the ($13,580 / $27,700) standard deduction rather than itemizing.   

1 thoughts on “The Tax Benefits of Home Ownership

  1. editor says:

    This file elaborates on various tax benefits associated with homeownership, including deductions on mortgage interest, property taxes, and home office expenses for self-employed individuals. It also discusses the impact of the SALT deduction cap and how it affects residents in high-tax states. The document further addresses the tax implications of rental real estate, emphasizing the importance of depreciation as a non-cash expense and the advantages of holding rental property in a limited liability corporation (LLC). It concludes with a note on the often more economical option of taking the standard deduction over itemizing​​.

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