Owning Real Estate for Real Property Tax Benefits

We all read about owning a home to enjoy value appreciation over time, but there are also some awesome real property tax benefits of ownership. Learn about these benefits realized in two ways. First, learn about the tax benefits of home ownership, and second, learn about tax benefits of an office in the home.

Real Property Tax Benefits of Home Ownership

Owning a home does offer real property tax benefitsi, but they are mostly dependent upon your ability to itemize your tax deductions on the return. If you take the standard deduction, you lose tax benefits. If you can itemize deductions, often it is because you have home ownership real property tax benefits that bring you over the standard deduction amount. Deductions include:

  • Some of the closing costs when buying a home.
  • Mortgage interest is deductible.
  • Real estate property taxes.
  • Mortgage insurance premiums.

As an example, if you have a $250,000 mortgage balance financed at 4.5%, you will pay and be allowed to deduct more than $11,000 in mortgage interest if you can itemize. That $11,000 puts you closer to the amount that would exceed the standard deduction.

You cannot depreciate your residence, but if you operate a business out of your home, you can do so in many situations.

Real Property Tax Benefits of a Business in the Home

The growth of freelancing and the gig economy has created a lot more use of home spaces for business purposes. Add to that the COVID situation and the businesses that sent employees home to work. Many businesses found that their overhead was lower letting their employees stay at home to work full or part time. Other businesses replaced employees with freelance independent contractors through attrition; this was another cost saving measure.

If your home use for business meets certain requirements, you can take advantage of the home office deductionii. From the IRS, you can qualify for home office deductions if you use part of your home:

  • Exclusively and regularly as your principal place of business
  • Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business;
  • In the case of a separate structure which is not attached to your home, in connection with your trade or business;
  • On a regular basis for certain storage use
  • For rental use (see Pub. 527); or
  • As a daycare facility

To qualify, the area that you use for business must only be used for business purposes.

Actual expenses method for calculating deductions:

Simply put, you use the square footage of the space for your office as a percentage of the overall square footage of your home. You can deduct that percentage of:

  • Utilities
  • Mortgage interest
  • Real estate taxes
  • Depreciation of the structure value

This is simplified, and you should consult a tax advisor or CPA to determine proper deduction calculation.

Simplified method:

Depending on your situation, home size and office space size, you may want to take the simplified route. You can, up to 300 square feet, use the square footage of the office/business space multiplied by $5.

Owning property can be financially helpful when you take full advantage of real property tax benefits.

i Publication 530 (2020), Tax Information for Homeowners – IRS.gov

ii Publication 587 (2020), Business Use of Your Home – IRS.gov

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