Tax Benefits of Homeownership for Military Families

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Post from MilitaryByOwner

Every few years, military members and their families grapple with whether or not the time is right to buy a house. The unknowns, like unexpected PCS orders, can make you think twice about a purchase. But for financially qualified military homebuyers, real estate is a relatively safe investment, especially if you consider (before signing on closing day) the tax benefits that apply to you. 

If you’re thinking about buying a house soon, look beyond the white picket fence and shiny new appliances and think about your overall tax situation and whether or not these benefits will help you cover homeownership expenses. It’s wise to talk with your real estate agent and tax professionals before deciding, especially regarding potential rental property deductions and capital gains taxes in the future. 

10 Tax Benefits of Homeownership for Military Families

1) Closing Costs

Talk with your real estate professionals about closing costs like origination fees when planning a home buying strategy—you could claim them as a tax deduction. The same is true for prepaid interest or pro-rated real estate taxes. 

2) Mortgage Insurance

You can itemize your private mortgage insurance (PMI) payments on your taxes and save some money. But, remember, if you’re using your VA loan benefit to buy a home, you aren't required to purchase PMI, which saves more money. 

3) Green Initiatives

If you add efficiency upgrades to your house, there may be tax credits and incentives. For example, energy-efficient exterior windows, doors, skylights, roofing (metal and asphalt) and insulation, heating and air conditioning systems, water heaters (natural gas, propane, oil), and Biomass stoves might qualify. 

4) Mortgage Interest

When tax time rolls around, you can add the total mortgage interest paid throughout the year and deduct it on your federal income tax return. Keep in mind that joint filers can’t deduct more than $750,000 and single and separate filers are capped at $375,000. 

This deduction might be significant savings if you’ve purchased a home recently because your initial mortgage payments primarily pay interest vs. the principal payments that come later in the loan term. 

5) Property Taxes

You probably don’t love paying local property taxes, especially if you PCS somewhere with a high property tax rate. But as a homeowner, you’re eligible for a property tax deduction. Joint filers can deduct up to $10,000, and married, but filing separately, taxpayers are allowed a $5,000 deduction each year. 

6) Home Equity Loan

Did you tap into a home equity loan to invest in home improvement projects? Your interest paid could be tax deductible. The IRS says you can deduct interest up to $750,000 or $1 million in mortgage debt ($375,000 or $500,000 if you're married and filing separately) depending on the loan’s origination date. 

7) Home Office 

Many military spouses own businesses and work from home now, so it’s a good idea to consider deducting your home office’s square footage on your taxes. You must use the space solely for your business, and there are other criteria to meet, so make sure you talk with a tax professional before deciding to claim the deduction. 

8) Military Move

In most cases, if the military pays for your PCS move, you won’t be eligible for a moving expense tax deduction. However, the IRS does say you can deduct your unreimbursed moving expenses for household goods, personal effects, storage, and travel expenses (including lodging) for you, your spouse, and dependents.

9) Rental Property Conversion 

Whether you pre-plan to rent your home or unexpected PCS orders decide for you, it’s possible to take advantage of rental property tax deductions associated with your rental property, like:

  • Cleaning and maintenance
  • Repairs
  • Property management fees
  • Property insurance
  • Travel to check on the property
  • HOA fees
  • Legal fees
  • Insurance claim deductibles
  • Utilities 
  • Expenses that exceed rental income 
  • Depreciation of the property over time

10) Capital Gains Taxes 

On the other hand, if you decide to sell your house, you’ll need to know about capital gains taxes. 

If you live in a house for at least two out of five years, it’s considered your primary residence. When it’s time to list the home for sale, you can keep a profit of up to $250,000 if single or up to $500,000 if married (filing jointly) without worrying about taxes on capital gains. This tax exclusion applies if, during the 2-year minimum of residence, you did not sell and defer capital gains on another property.

If, however, you don’t meet the 2-year “use and ownership” requirement, there is hope. If you serve on qualified official extended duty orders, the IRS may suspend the 5-year ownership timeframe for the tax exclusion for up to 10 years. This exclusion is good news if short notice orders pop up.

This exclusion on the gain is valid as long as the military member meets the following:

  • Qualified official extended duty for more than 90 days (or for an indefinite period)
  • Duty station that is at least 50 miles from their residence
  • Resides under government orders in government housing

Homeownership is one way military members can build wealth and plan for their future after service. Knowing about all the tax benefits relevant to your circumstances can help you decide whether or not it's the right time to invest in a property. 

Note: This article is for informational purposes and is not legal advice. Check with your accounting professional for specifics regarding your tax situation.

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