Jean Wawrzyniak-Fry Realtor® (480) 721-1195

Tax Advantages in Home Ownership

Mortgage Interest Deduction

Many people say there are considerable financial advantages to owning a home. You are paying money into an actual investment, instead of into your landlord’s bank account. They say you are always paying a mortgage…will you pay your own or the landlords?  But beyond this basic financial benefit are some other benefits as well, particularly when it comes to tax time.

With rents around the country skyrocketing the tax benefits of owning a home only become more magnified!

The exact tax advantages that you will get from owning your home will vary based on a number of factors, but  the average homeowner typically gets thousands of dollars in tax deductions related to ownership. The value of these deductions is considerable, and will be especially notable if you have always rented before.

There are several common tax deductions that homeowners can claim, including:

Capital Gains Exclusion

The capital gains exclusion from selling your home is easily the most substantial tax advantage a homeowner gets from ownership. When you sell your home – hopefully for more than you bought it for – you get to keep the profits up to $500,000 when you are married and $250,000 if single. When you sell other investments, like stocks or bonds, these are often taxed at around 15%, so you can see why this is such a great benefit. You have the potential to walk away with up to half a million dollars without paying taxes.

Typically these profits are used to buy another home, which is why the tax system is designed this way. You take your tax free money and invest it in more real estate – the smart move for you and for the economy.

Mortgage Interest

In all the excitement of purchasing a home many buyers forget about all of the home buying tax deductions come April in the next calendar year. There are lots of tax advantages too including deductions for –mortgage interest, discount points, property taxes, pro-rated interest, mortgage insurance and a few others.

When you take out a mortgage you can expect to pay a considerable amount of interest, depending on the price of your home and the rate of the mortgage. Much of this interest is paid up front on the loan, meaning that for the first years of home ownership your monthly payments will be going towards interest – two-thirds of each payment, in many cases. Even if you get a fantastic rate on your mortgage, you are still borrowing hundreds of thousands of dollars, which results in a sizable interest payment. Fortunately, you are able to deduct this mortgage expense on your taxes.

The federal government allows you to deduct all of the interest on the mortgage up until you hit $1 million in interest, or $500,000 if you are married and filing separately from your spouse. For most home buyers this means you will be able to deduct mortgage interest throughout the life of the loan.

If you were to take out a mortgage for $300,000 and you had a fixed-rate loan at 4% for 30 years, you would be paying around $11,000 over the first year towards interest. If you fall into the 25% tax bracket you would be able to deduct approximately $2750 off your taxes. Wow!  Deducting an extra $2750 off of your yearly tax bill is something anyone can appreciate.

Discount Points

   Discount points on the rate of the loan are another tax advantage.  A point is essentially 1 percent of the loan amount. So using the example of a $300,000 loan one point would equal 1% of $300,000 or $3000 dollars. There is a price for each point, but then you get the enjoy the benefit of having a lower interest rate on your home and the lower monthly payments that result from such an interest rate.

Typically you should pay points if you expect to be in a home for an extended period of time. Some buyers choose to do this and some do not, but those that do may be able to deduct the cost of those points. A single point purchase could save you $500 or more off of your tax bill the first year after you buy your home.

When trying to decide whether it makes sense to pay points or not you will want to take the difference in payment between paying points and not paying them. You then need to figure out how long it will take for a payback on that difference. If you are only planning on staying in the home a couple of years then you would probably opt not to pay points. As the difference in payment would not be enough to offset the cost savings.

Property Taxes

Wherever you buy your home, you can expect to pay some sort of property taxes.  Usually property taxes are based off of the assessed value of the house, property taxes are an expense that every homeowner needs to plan for. They can be costly, especially in certain areas of the country.

One tax advantage that comes from paying those taxes, though, is that you can deduct them from your yearly tax bill. You could easily wind up deducting $4,000 or $5,000 a year just from property taxes. Again, a deduction that everyone can appreciate. This should be discussed with your accountant or tax professional when preparing your yearly taxes.

Mortgage Insurance

For most people, paying a 20% down payment on a new home is just not possible. Unless you make a considerable amount of money from your job, enjoy some inheritance or have help from your family, 20% is often too steep an amount for most people to come up with.  Many people incorrectly assume a small down payment is not a possibility when purchasing a home. This is certainly not the case. The cost of not having a 20% down payment however is that you have to take out mortgage insurance in most circumstances.

Fortunately, you should be able to deduct the cost of your mortgage insurance off of your tax bill, as long as you make less than $100,000 a year. Great tax advantage!  If you make between $100,000 and $109,999, you may also be able to deduct a portion of your mortgage insurance payment. Most people who claim this deduction enjoy a sizable deduction amount, averaging around $1,000.

As of now, the mortgage insurance deduction has not been renewed by Congress for 2015. If it is not renewed, you will not be able to use this deduction. However, Congress typically waits to renew this particular deduction until the end of the year, so there is hope that it will be there when you file.

Home Improvements

   It is important that you save the receipts for all work done on your home that is considered an improvement. Things such as replacing old kitchen counter tops with granite, replacing a new heating system, adding new windows, replacing a roof are considered improvements. Keep in mind however that not everything you do to your home is considered an improvement. A repair for example is not considered an improvement. While in the true sense of the word it is, the IRS does not treat repairs the same as improvements. So repairing a window is not the same as replacing one.

While you cannot deduct these improvements from your current years tax bill when it comes time to sell they can be added to the purchase price of your home. This will be used to figure the cost basis for tax purposes. As a homeowner it is important to understand what home improvements add value and which don’t. Many mistakenly believe that all home improvements add value. This is not true.

Home Equity Loans

One little known tax break for owning a home is the ability to deduct the interest on a home equity loan. When doing some of the home improvements discussed above you can take out an equity loan to do so. The interest generated from the loan can be deducted on your taxes up to $100,000 of mortgage debt.

Home Office Deduction

Another tax benefit of owning a home is the possibility of deducting a home office on your taxes. We are seeing more and more people work at home.  There are some requirements that you must meet explained in detail in the IRS guidelines including it’s a principle place of your business or you are regularly using a space in your home for business. This is a deduction you will not want to fool around with as their is a high audit rate from those who claim the home office deduction.

Final Thoughts

There are more than just tax benefits for owning a home. Over the long haul a home is an investment. While owning a home each month you are building equity in the property every time you make a mortgage payment. Even though we have just come out of one of the toughest times for real estate in decades, historically it is a wealth builder. In fact from a long term perspective it is one of the best investments you can hold.

Finally the enjoyment one gets from having something tangible is important. Many years of memories and enjoyment are made in the homes we live in. All these things make the American dream of home ownership alive and well.  A house is a home and that is so much more than an investment.

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