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Homeownership Tax Benefits

The question that always comes up at the settlement table or a few weeks after closing is, “What are the tax benefits that I get now for owning a home?” As much as I would like to help my clients out and provide top notch service, I am not a bona fide tax professional.  I am licensed to help my clients buy real estate and I am really good that so I’ll stick with it.  A lot of people don’t realize the tax benefits of renting vs. buying.  There are many benefits to buying and very few if any, to renting.  This being said, the tax benefits of real estate ownership is something every buyer should understand.

The tax benefits of buying a home include:

  1. Home Mortgage Interest Deduction – The interest paid on a mortgage or mortgages of up to $1 million for a principal residence and/or second home is deductible as an itemized deduction.  During the early years of the home loan most of the payments consist of interest, so the deduction is particularly substantial during the first years of homeownership.
  2. Home Equity Loan Deduction – Homeowners can borrow up to $100,000 against the equity in their home and deduct the interest as an itemized deduction.  The money can be used for any purpose, such as paying off high interest credit card debts.
  3. Property Tax Deduction – Homeowners also get to deduct from their federal income taxes: the state and local property taxes they pay on their home.
  4. Deductible Home Buying Expenses – Various closing costs ordinarily involved in purchasing a home are also deductible as itemized deductions, including loan origination fees (points), prorated interest on a new loan, and prorated property taxes paid at settlement.
  5. $250,000/$500,000 Home Sale Exclusion – The greatest tax benefit of owning a home is when you sell your home at a profit.  Homeowners who lived in their home for two of the prior five years prior to its sale do not pay income tax on a substantial amount of their profit.  $250,000 for single homeowners and $500,000 for married homeowners who file jointly.  This exclusion can be used once every 24 months.

The only tax benefit a renter can qualify for by being a renter is the home office deduction.  This is a business deduction available to renters who own a business and have a home office they use regularly and exclusively for business purposes. Of course, consult your accountant or local tax professional to get a better understanding of all the tax benefits.

The statement you always here from others, “It’s always better to buy than rent,” is not always true. There are always different circumstances for each individual.  Run the numbers before you jump the gun and get in over your head. Here are some calculators that will give you a better idea of what you can afford.

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