Tax Benefits of Homeownership for Military Families

A couple looking at paperwork

Post from MilitaryByOwner

With orders in hand for our upcoming military move, my spouse and I decided to buy a house rather than rent. Most likely, the new assignment would be for a few years, so it made sense to invest in a place to call our own.

Having already been stationed from place to place, our family was thrilled with the idea of somewhat settling down. For us, owning our own home was a step towards a sense of belonging within a local community.

Looking ahead to the month of April and the deadline for filing taxes, the idea of owning a home offers a military family several tax benefits. Follow along with this list of the tax benefits of homeownership.

Mortgage Interest

When tax time rolls around, a military homeowner will add up the total of the mortgage interest they’ve paid throughout the year. This amount will be deducted on their federal income tax return.

Property Taxes

The payment of property taxes to the local jurisdiction or to the state government will also be a tax deduction for a homeowner.

Closing Costs

With the sale or purchase of a home, the origination fees (points) on a loan could be claimed as a tax deduction. As perhaps noted in the closing paperwork, any pre-paid interest or pro-rated real estate taxes can also be deducted.

Military Move

If a homeowner had a PCS (Permanent Change of Station) from one address to another, they’ve hopefully kept track of their important receipts. With proper paperwork, a homeowner could claim unreimbursed moving expenses for a deduction.

Home Equity Loan

With a home equity line of credit, a homeowner can deduct the interest paid, up to $100,000, towards the home equity debt. For example, a home equity loan may come in handy if a homeowner has a strategy for a series of remodeling projects. Beyond just day-to-day upkeep and repair, these improvement plans would be for home restoration projects.

Green Initiatives

The idea of going green or having smart-home technology is fascinating to many homeowners. When adding energy efficient amenities, a homeowner can apply for tax credits. For further detail, peruse the list of Residential Energy Credits on the IRS (Internal Revenue Service) website.

Rental Property

When a homeowner gets military orders to move, they may decide to keep their home and rent it out. By becoming a landlord, they will not pay taxes on their rental income. Also, the homeowner can subtract the interest portion of their property mortgage payment, but not what is paid towards their principal balance.

Additionally, the homeowner can deduct from their taxes the costs associated with a rental property, such as

  • Advertising
  • Cleaning and maintenance
  • Repairs
  • Property management fees
  • Property insurance
  • Travel to check on property
  • HOA fees
  • Legal fees
  • Insurance claim deductibles
  • Utilities that the homeowner may cover
  • Expenses that exceed what is earned in rent
  • Depreciation of the property over time.

Anything related to keeping a residential rental property up and running are considered itemized business expenses and tax deductible.

Capital Gains

If a homeowner lives in a property for at least two out of five years, it’s considered their primary residence. When it’s time to list the home for sale, the homeowner can keep a profit up to $250,000 if single or up to $500,000 if married (filing jointly), with no worries over taxes on capital gains. This tax exclusion applies if during the 2-year minimum of residence a homeowner did not sell and defer capital gains on another property.

If, due to this whirlwind of military life, a homeowner does not meet the 2-year “use and ownership” requirement, there is hope. When a military member is serving on qualified official extended duty orders, they may suspend the 5-year ownership timeframe for the tax exclusion, for up to 10 years.

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

  • On qualified official extended duty for more than 90 days (or for an indefinite period)
  • At a duty station that is at least 50 miles from their residence
  • Or, residing under government orders in government housing.

This is particularly good news when short notice orders come up. With their service commitment, a military member will not have to fret over taxes on the gain from the sale of their main residence.

Of course, with the spontaneous nature of assignments, a military family might choose to rent a home rather than buy. However, as recent changes with BAH (Base Allowance for Housing) have proved, rental rates may fluctuate in response to the housing market. Rather than a lease on a rental property, having a fixed rate mortgage allows a homeowner to define their housing budget from year to year. A military family may appreciate that small sense of stability in their ever-changing lifestyle.

For more in-depth tax information, feel free to contact a tax advisor or real estate professional from the military friendly business directory available at MilitaryByOwner.

Note: information is for informational purposes only and not meant to be legal advice. Check with your accounting professional for specifics regarding your own tax situation.

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