Know Your Tax Benefits as a Homeowner – Complete Guide

It’s the time of the year when house owners shell out a hefty sum of money in lieu of the taxes paid by the homeowners. Whether you own the property, are constructing it, or just had a loan sanctioned to build a home; you ought to pay taxes according to your respective tax codes.

Little do these homeowners know about the tax benefit that the same tax code gives them like not considering income from rents as a taxable income. This means that homeowners don’t have to pay any tax for the imputed rental incomes.

Now that we have your undivided attention let us look at some other tax benefits that you should know as a homeowner.  

Benefit 1: Private mortgage insurance

If you are a homeowner who is putting down less than 20% of the total value of the house, then the chances are that you’re paying a PMI (Private Mortgage Insurance) which can cost you anywhere from a whopping 0.3 5 to 1.15% of the total value of your home loan.

New reforms now enable the homeowners to save a hefty chunk of money as the reforms extend its ability to reduce the interest paid on the PMI. This deduction is labelled as an itemized deduction, and if you take it, it may help you to push over the standard deduction of Rs 2,00,000.

For example, if you live in Mumbai, India, earn around Rs 10,00,000 annually and put down around 5% to construct a Rs 20,00,000 1 BHK flat in Mumbai

, then you have to pay around Rs 15,000 annually just as annual PMI premiums. This reduces your taxable income by the same amount of Rs 15,000. How nice is that for a reform?

Benefit 2: Property taxes

A property tax is a tax that a homeowner pays to the government depending on the house’s assessed value and the mill levy in that particular area. Find out whether you’re coughing up a lot of money in lieu of property tax or not by calculating the property tax correctly.

Despite property taxes being absolutely high, taxpayers can only receive a capped amount of Rs. 2,00,000 for married couples filing jointly. Property taxes are itemized tax that is levied as apart from standard deduction of Rs. 2,00,000 for married couples.

The standard deduction for a married couple being Rs 2,00,000, requires another itemized tax deduction that sums up to at least Rs 2,00,000 to obtain property tax benefits. The taxes are built into the monthly payment of premium if you have a mortgage.

Benefit 3: Mortgage interest

Since its inception, the deduction for mortgage interest has been one of the most lucrative tax deductions for homeowners. For homeowners with a loan before December 15, 2017, there is a reduction in the rate of interest on loans up to Rs 2 crores. However, after the said date, if you sanction any home loan, the rate of interest is deduced for only the first Rs. 1.75 crores.

This simply means that the more recent your mortgage is, the more tax savings and benefits you obtain from the government. This is an itemized deduction as well, which means that your sum total of itemized deduction should be Rs 2,00,000 in order for you to obtain this benefit.

(The itemized deduction is Rs 2,00,000 for married couples, Rs 1,18,000 for the head of households and Rs 1,00,200 for individuals.)

For example, if you’re a married couple who pay around Rs 2,00,000 as mortgage interest and Rs 60,000 as central and state taxes, then you exceed the itemized deduction from standard deduction by Rs 60,000. Your taxable income will be reduced by the same amount of Rs 60,000 by itemizing.

Benefit 4: Interest on a home equity line of credit (HELOC)

Earlier, people used the house loan to pay for other commodities like a car, education wedding, etc. and still get deduct their interest legally.

Now, the interest on the loan is only deductible if you are using the loan for what it was meant to be used- to build, buy, improve, or renovate a property.

You can get a maximum deduction of Rs 1,50,000 that is a capped amount. This only accounts for the amount that you pay for the mortgage and HELOC as interest on them. You’ll still be able to save enough cash to revamp your terrace garden, don’t worry!

Benefit 5: Home improvements to age in place

If you’re a person who likes to experiment and revamp your house because you’re looking to age in the same house, there’s something for you too. You can now claim deductions for improvements only if they cost more than 7.5% of your annual income.

For example, if you earn Rs 6,00,000 a year, the deduction will only be valid if you spend more than Rs 45,000 on improvements.

The improvements can have things like adding stair lifts, grab bars for elderly, wheelchair ramps, widening doorways, etc. only after a doctor medically authenticates via a letter that you needed these improvements as a medical necessity.

Benefit 6: A home office

Earlier, if you were unemployed, you could deduct the tax for office expenses and space. Now this deduction can’t be claimed anymore after 2017.

Anyway, for people who are self-employed and whose office is their home, you can get a deduction of office space at Rs 200 per square foot, for up to 300 square feet of office space. This means that you can get a maximum deduction of Rs 60,000 by working from home. Wow!

There are rigorous rules as to what is considered as an acceptable office space, so before you get a little too excited, you may want to read the home office tax deduction guidelines that are mostly misunderstood by many.

Conclusion

We know that you can’t stop smiling from what you have discovered today. Something as simple as a house can make you save a lot of money as tax returns. We bet you didn’t know most of those. Want to know how much you can save in a calendar year as tax benefits? Find out by using the tax return calculator for free.

We recommend you to read the complete guidelines available in your country-specific websites about tax returns. The points presented here are just guiding lights for you to be aware of these taxes.