3 Tax Benefits for Chicago Homeowners
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As of February 2016, the median monthly rent in Chicago was $1,631, according to Zillow. This is a year-over-year increase of 0.4 percent. Although those rent checks are helping build your landlords’ long-term wealth, the same can’t be said for you.
Buying a home, however, can help you build wealth over time. It’s less expensive than renting long-term and comes with many other financial incentives, especially at tax time. Here are just a few tax benefits available to Chicago homeowners.
Related: 9 Tax Breaks Every First-Time Home Buyer Must Know
1. Mortgage Interest Deduction
If you’re a homeowner, you can deduct the interest you pay on your home loan. This is probably the best-known tax benefit of homeownership. Mortgage interest deduction can lead to significant tax savings, even bumping you into a lower tax bracket overall.
“Your biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest,” said Brian Bockholdt, manager of mortgage sales at Great Lakes Credit Union. “All that interest may be deductible, unless your loan is more than $1 million.”
New homeowners should work closely with tax professionals and mortgage lenders like GLCU to maximize their mortgage deduction. For example, if you paid for discount points on your loan at closing, those points are deductible because they are essentially pre-paid interest. Each discount point will cost a homebuyer about 1 percent of the total amount mortgaged, and purchasing a point generally lowers the interest rate on your mortgage by 0.25 percent.
Even if you didn’t pay for points, it’s always a good idea to save closing paperwork for your tax preparer. In many cases, mortgage lenders include some pre-paid interest as part of your initial escrow, and that interest is also tax deductible.
2. Other Itemized Deductions
Homeownership comes with a host of other deductions, as well. For instance, some home improvements that increase energy efficiency are eligible for tax deductions: like installing solar panels. Solar panels will not only help you cut down your electric bill, but could also reduce your annual income tax owed.
Another deduction you might not have thought of is the home office deduction. If you regularly work from home or use your home or garage to store work-related supplies, you could be eligible. Space in your home can serve two purposes — helping you earn income throughout the year and helping you save it at tax time. These are just two common examples, so be sure to search for other deductions that fit your specific situation.
3. Capital Gains Savings
Homeowners also have the opportunity to save on taxes when they sell a home. If you buy a home and live in it as your primary residence for more than two years, you qualify for a capital gains exclusion. This means that if you sell your home, you can keep any profits up to $250,000 without owing capital gains taxes. For married couples, that exemption doubles to $500,000.
Additionally, interest rates are still near historic lows: The annual percentage rate on a 15-year fixed mortgage at GLCU is currently 3.22 percent. So now is an excellent time to explore homeownership in Chicago as a way to build up your own net worth — and not your landlord’s — over the long run.
