For many, purchasing a home is one of the largest investments they will make in their lifetime. While you will have to invest a large portion of your savings, making this purchase comes with many tax benefits. Such as the mortgage interest credit, the residential energy efficiency credit and homeowner’s property tax credit. If you own a home, learn what tax relief is available to you as a homeowner in 2021.
What are the tax benefits of homeownership?
Homeowners tax credits are specific tax benefits made available to those who own a home. These credits should not be confused with the homestead tax exemption or the Section 121 exclusion. These are dollar-for-dollar credits that will reduce your overall tax bill, and if the credit is refundable, any refundable portion will be given to you as a tax refund. In short, being able to take advantage of a homeowners tax credit can lead to a substantial tax savings.
2008 First-Time Homebuyers Tax Credit
You may be familiar with the Obama era First- Time Home Buyers Tax Credit of 2008. The First-Time Home Buyers Tax Credit was part of the Housing and Economic Recovery Act and gave new homeowners up to $7,500 during the first year of the program. By the second year of the initiative, the tax credit was increased to $8,000.
Unfortunately, this tax credit expired in 2010 and is no longer available to homeowners, but they may still be able to receive assistance purchasing a home through the Veteran Administration, the Section 184 Indian Home Loan Guarantee, or the United States Department of Housing and Urban Development FHA Loan Program
Joe Biden's proposed first-time homebuyers tax credit
While the 2008 First-Time Homebuyers Tax Credit has expired, the Biden administration has proposed a similar tax credit program that could roll out this year. The legislation is still underway, so you'll have to wait to see the nuts and bolts of the plan, but it proposes a $15,000 first-time homebuyers tax credit.
Aside from the First-Time Homebuyers Tax Credit, there's an array of other tax relief you could qualify for.
Mortgage interest credit
The mortgage interest credit is a tax incentive designed to help lower-income individuals achieve homeownership. If you were issued a Mortgage Credit Certificate by your state or local government, you could be eligible for this credit. If eligible, you can claim it on IRS Form 8396.
Residential energy efficient property credit
The residential energy efficient property credit is a nonrefundable credit (meaning it only lowers tax liability) offered to homeowners who made energy-saving improvements to their principal residence during 2018, 2019, or 2020 in the United States. This credit is subject to some additional limitations.
If eligible, you can claim this credit using IRS Form 5695. Eligible improvements include: solar electric property, solar water heating systems, small wind energy, and geothermal heat pumps. Eligibility for this credit spans beyond the scope of this article. You can find the full details by reviewing IRS Form 5695 instructions or by contacting your tax advisor.
Energy-saving improvements may also qualify you for additional tax credits offered by your state or local government. To learn more about your eligibility by state, you can visit the Database of State Incentives for Renewables and Efficiency.
Tax credits offered by state and local governments
Many states and local governments offer the Homeowners Property Tax Credit (not to be confused with the homestead property tax credit or exemption). You should check with your jurisdiction for applicable rules. In general, the Homeowners Property Tax Credit is a dollar-for-dollar reduction in your property tax liability. If eligible, you can take advantage of this real property tax credit. Even if you believe you're eligible, always check in with your state or local jurisdiction's property tax division to learn more about the applicable rules. In most cases, you will have to submit an application to your local property tax division.
Outside of the Property Tax Credit, your state or local government may offer a variety of tax credits, such as tax credits to rehabilitate the property, tax credits for historic property, and a host of other tax credits.
The Millionacres bottom line
There are many tax credits available to homeowners during tax season. From the residential energy efficiency property tax credit to the mortgage interest tax credit, homeowners have the ability to take advantage of these credits and have a huge tax break. With careful planning and research, you could substantially reduce your tax burden this filing season.