Tax Benefits of Home Ownership in Australia

By Simon Cooper
July 28, 2022

Technically speaking, more than an enjoyable, happy place where you can live, laugh and learn, a home is a place where you legally reside that can provide the homeowner with many tax benefits. The decision of buying a home should not stop with whether you should or shouldn’t. This purchase is an investment that should require more than just a yes or a no, since it also poses questions like how and why.

Once the decision has been finalised and the ‘yes’ has been keyed-in, it is important to note that there are different classifications of a home, an owner-occupied home or an investment property. When buying a home or apartment with the intention of living in it, it’s called an owner-occupied property. If the plan is to rent it, it’s considered an investment. As it is hinted in the name, the difference between owner-occupied residences and investment properties comes down to what the homeowner intends to do with them but even with the huge distinction between them, they share advantages that will most definitely benefit the homeowner.

  • Deduct Mortgage Interest – One of the most important tax benefits that comes with owning a home is the fact that you may be able to deduct any mortgage interest that you pay. It allows homeowners to deduct the interest they pay on any loan used to build, purchase, or make improvements upon their residence, from taxable income.The proper term for this is ‘home acquisition debt’. The Internal Revenue Service (IRS) provides certain tax advantages for home acquisition debt:
  • You’re able to deduct home acquisition debt on a second home as well as your main home (note, however, that when it comes to second homes, special rules apply if you rent the home out for part of the year).
  • For mortgage debt incurred prior to December 15, 2017, up to $1 million of home acquisition debt ($500,000 if you’re married and file separately) qualifies for the interest deduction. If your mortgage loan exceeds $1 million, some of the interest that you pay on the loan may not be deductible.
  • For mortgage debt incurred after December 15, 2017, up to $750,000 of home acquisition debt ($375,000 if you’re married and file separately) qualifies for the interest deduction. If your mortgage loan exceeds $750,000, some of the interest that you pay on the loan may not be deductible. A deduction is no longer allowed for interest on home equity indebtedness.
  • Mortgage Insurance – It is provided by the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, and qualified private mortgage insurance (PMI) providers that will treat the amounts you paid during 2021 for qualified mortgage insurance as home mortgage interest, as long as the insurance was associated with home acquisition debt and was being paid on an insurance contract issued after 2006. It is important to note that the deduction is phased out if your adjusted gross income was more than $100,000 ($50,000 if married filing separately). Beginning in 2022, amounts paid for qualified mortgage insurance will generally not be deductible.
  • Deduct Real Estate Property Taxes – If your deductions are itemised on Schedule A, it will allow you to deduct real estate taxes that you’ve paid on your property in the year that they’re paid to the taxing authority. However, for 2018 to 2025, individuals are able to claim an itemised deduction of up to only $10,000 ($5,000 for married filing separately) for state and local property taxes and state and local income taxes. In the past, there were no dollar limits. So if you pay your real estate taxes through an escrow account, you can only deduct the real estate taxes actually paid by your lender from the escrow account during the year. It is important to note that only the legal property owner can deduct real estate taxes, you are not allowed to deduct homeowner association assessments, due to the fact that they are not imposed by a state or local government.
  • AMT Considerations – It calculates what you must pay to the government, no matter how many deductions or credits the filer may claim. When you take out a loan to buy a home, or when you refinance an existing loan on your home, you’ll probably be charged closing costs that may include points, as well as attorney’s fees, recording fees, title search fees, appraisal fees, and loan or document preparation and processing fees. You’ll need to know whether you can deduct these fees, whether in part or in full, on your federal income tax return, or whether they’re simply added to the cost basis of your home. Generally, you cannot other settlement fees and closing costs on your tax return. Instead, you must adjust your tax basis in your home.

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Buying properties and making investments in hopes of reaching your financial goals throughout your life can be quite a challenge but not at all impossible. Proper planning will give you the ability to effectively budget costs and make smart investment choices that will help you reach your financial goals. From superannuation to tax minimisation to investments, we understand why most people feel hesitant to start their own wealth creation journey. Help will always be given to those who need it.

At Forward360, it is our goal to help you prioritise your financial goals. Navigating the world of property investing can be tough and the pressure of doing it for the first time can be overwhelming but we have a diverse pool of professional financial experts that are dedicated to educate and help you create a strategy that will help you set your goals in motion. We are never out of touch, we will always keep you in touch. Contact our support team today.

Simon Cooper

Co-Founder, Managing Director, Financial Adviser

Simon is a financial advisor who takes his work seriously. He ensures that all of his clients receive the best possible advice, so that they can reach and exceed their financial goals, both personally and professionally. Simon has been in the business for many years, and has a wealth of experience to share with his clients. He is known for being friendly and approachable, and always puts the needs of his clients first. Simon Cooper is an Authorised Representative of Reedy Capital Pty Ltd (AFSL No. 495539), Authorised Representative Number 1248807 and a financial adviser at Forward360.

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