Buying a home is a huge step in life. Besides putting your money towards something tangible, you’ll have something of value that will pay immediate dividends. The tax benefits of buying a home are only a small part of the overall value of being a homeowner.
Mortgage Interest Tax Deduction
The biggest and most talked about of all of the tax benefits of buying a home is the deduction for the interest paid on your mortgage. This is a substantial part of your payments, and it can sting a little if you break down what you’re actually paying. To take away some of the sting, deduct those hefty interest payments from your taxes. Hopefully, you’ll get a nice chunk back for your trouble. This break starts to get more complicated if your mortgage is for over one million dollars, but for most of us, this won’t be an issue. In addition to your first mortgage, the interest on a second mortgage is also deductible. If you have a mortgage, or two, or are thinking about taking one out, it could mean big savings and would be a great advantage to talk to your lender about the tax benefits of buying a home.
A similar deduction and another of the many tax benefits of buying a home is the deduction for a home equity loan. If you’ve used the equity on your home for any projects or vacations, you could write off the interest.
Property Tax Deduction
Another of the tax benefits of buying a home is related to the mortgage interest deduction. The property tax deduction could lead to a sizable refund. The amount you pay will either be noted on your financial statement, if it’s paid through an escrow with your lender, or will have been paid to the municipality directly. If you’re a first time buyer and you paid partial taxes or reimbursed the former owner when you bought your property, that should be noted as well. You should also note that only money actually paid towards property tax will count. If you paid into the escrow more than was deducted for the tax, that won’t be able to be deducted until it’s actually used.
Home Office Deduction
If you do some work on the side, or if you’re self-employed and work from home, you can take advantage of the home office deduction available as one of the tax benefits of buying a home. This one can get a little tricky, but you can deduct a portion of your home expenses and cost of your home depending on the size of your office.
Selling Your Home
The tax benefits of buying a home don’t stop with deductions. If you sell your home (under $250,000 or $500,000 if married and filing jointly), the proceeds will be tax-free. This wasn’t always the case, but the law was changed about 20 years ago, and home owners can reap the benefits. In addition to the dollar cap, you must have owned the home for at least two years and lived in the home for two of the last five years. These are things to look into before you sell your home and double check on your checklist.
If you paid points when you took out your loan, you could take them as a deduction as well. This gets a little complicated. The simple version is that you can deduct them in the year that you paid them, but there are a few stipulations. They must be for your main home, and the points must be within the norm for your area. There are much more qualifications than this, too many to get into here, and it will help you a great deal if you talk to your lender when you’re asking about the tax benefits of buying a home.
There are more tax benefits of buying a home than I talk about here, but these are the big ones. It can be a little daunting to look at your statements and find out how much goes towards just the interest, but with some well-planned deductions you can breathe easy and bask in the sunshine of your yearly refund.
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