Tax season is here!
The Internal Revenue Service has a rep for being grumpy with people, but there is one group that the IRS loves.
There are considerable financial benefits to owning a home. Instead of your money going into your landlord’s bank account, when you own property you are making an investment into your future.
As a homeowner, you can enjoy certain tax benefits renters don’t have access to.
The exact tax benefits that you will get from owning your home will vary, and this blog should by no means be taken as tax advice. Here at LancLiving.com, our job is to educate potential home buyers. However, suffice it to say that the average homeowner typically gets thousands of dollars in tax deductions that renters don’t get.
Here are just a few examples of the tax benefits of home ownership:
This is huge to average Americans. When you take out a mortgage, you can expect to pay a considerable amount of interest, much of which is paid early in the life of the loan. It’s called amortization. So for a number of years much of your monthly mortgage payment goes towards interest. You can deduct this interest on your taxes.
The IRS allows you to deduct all of the interest on the mortgage up to $1 million in interest or $500,000 if you are married and filing separately from your spouse. So, most likely, you’ll be able to deduct mortgage interest throughout the life of the loan.
Say you take out a mortgage for $100,000 with a fixed-rate loan at 4.25% for 30 years. You’ll pay around $5,000 your first year toward interest. If you fall into the 35% tax bracket, you would be able to deduct some $1,750 off your taxes. Is your landlord going to offer you that off your rent? He sure enjoys the benefits of his deductions though.
In Pennsylvania, every home owner pays property taxes. That includes local school and government taxes. Around here, they are based on the assessed value of your home and most people have them escrowed (your mortgage holder secures them as part of your montly payment and pays them when they are due). A bonus that comes from paying property taxes is that you can deduct them. You could easily wind up deducting $2,000 or $4,000, depending on the taxes you pay.
For most folks, paying a traditional 20 percent down payment is out of reach. We work with a lot of buyers that take advantage of FHA loans that allow a buyer to put down only 3.5 percent. The downside of putting less than 20 percent down is mortgage insurance. For a $100,000 home that can be as much as $70 a month in mortgage insurance.
The good news is that you may be able to deduct a portion of mortgage insurance off of your taxes. Congress has often threatened this deduction since it was offered in 2007, but to date they have not followed through on the threat, and hopefully they never will.
Home improvement can be deducted, but remember that there is a difference between home improvements and general maintenance. General maintenance, like fixing broken pipes, are not tax deductible. Installing new windows are home improvements.
Home Office Deduction
If your home office is your principal place of business, or you regularly use a spot in your home for business, you can deduct that space and the utilities you use from your taxes. Be warned however, that there is a change of audit if you screw up these numbers.
Although not as common these days, you may have chosen to purchase discount points as a way to lower the interest on a loan. A point is one percent of the loan amount. Paying a point or two translates to a lower monthly payment because you have bought down the interest rate. As an example, a $100,000 loan one point would equal 1% or $1,000. On your taxes, a single point purchase could save you $500 or more off of your tax bill the first year after you buy your home. Less interest and less in taxes? Yes please!
Don’t buy a home just to get tax deductions. Buy a home because it is an investment in your future and in yourself. Owning allows you to build equity and build something for yourself. It allows you put down roots and focus on more than just paying rent and getting by.