If you’re thinking about buying a new home there are many things to consider, including the tax benefits of owning a home.
Sure, filing taxes may become a little more complicated, but you may be able to deduct home-related expenses and the savings on can add up to thousands or even tens of thousands of dollars. Because the tax rules for homeowners can be tricky, I recommend you consult with a tax professional before deciding what you can and cannot deduct. But in general, you can figure on a number of significant tax breaks associated with homeownership, including:
Mortgage interest. The biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. In most cases, the interest homeowners pay is deductible. This may mean a reduced tax bill overall and a bigger refund.
Property taxes. As a homeowner, you are entitled to deduct payments of real estate tax on your property if you claimed itemized deductions on your tax return. The IRS allows you to deduct real estate taxes on your primary residence and any other homes you own. There are no limits on the dollar amount of real estate taxes you can deduct.
Loan deductions. When homeowners borrow against the equity of their home to finance other investments, the interest they pay on the new loan is also tax deductible, within IRS guidelines. Generally, equity debts of $100,000 or less are fully deductible.
Improvements on your residence: While you generally cannot deduct improvements to your home on your taxes, such items can lower your tax bite down the road. Improvements such as a family room addition, a kitchen makeover, or a pool increase the “basis” of your home – i.e., the purchase price plus improvements. When you go to sell, the higher your basis is, the less you will have to pay in capital gains taxes if you pay at all.
Tax-free profits. The government allows homeowners to keep tax-free profits from the sale of a home that has been their primary residence for at least two years. Single taxpayers don’t owe taxes on the first $250,000 of profit from the sale of a principal residence, while married homeowners get $500,000 when filing jointly.
These tax savings can add up quickly. On a $500,000, 30-year mortgage loan at five percent, for example, a homeowner would end up paying nearly $25,000 in the first year in interest alone. At a 33 percent federal and state income tax rate, the mortgage interest deduction alone would save more than $8,200 in that tax year! But again, tax laws are complicated and everyone’s tax situation is different. Consult your tax professional to see how the rules apply to your situation. In the meantime, if you have any questions about purchasing a home and how much you can afford, feel free to give me a call!