Filing income tax returns is an annual rite of dread for most Americans. Winding through the maze of deductions, credits, rules and forms can be quite a chore. Even if you use a tax preparer it still is a time consuming process to organize all the information they’ll need to complete your return. However, it’s crucial to your bottom line to take advantage of all the existing tax deductions. Thankfully for homeowners there do currently exist a number of tax deductions and advantages. For detailed information please consult your tax advisor but here are a few highlights.
- Mortgage Interest Deduction – Commonly the most known advantage of owning a home with a mortgage is the mortgage interest deduction. This tax law allows itemized filers to deduct the interest paid on a loan for a principal or secondary residence for up to $1 million of loans. It’s a deduction essentially equal to the difference between your standard and itemized deduction possibilities multiplied by your marginal tax rate. While recently under some consideration for modification, it’s likely this deduction will stand the test of budget cuts because it is a hugely popular program and any substantial change would cause a backlash among consumers.
- Property Tax Deduction – Home owners can deduct state and local property taxes from their federal return on Schedule A if itemizing deductions.
- Profits From Home Sale – One of the best tax allowances for home owners is the ability to exclude $250,000 in profits made on a principal residence in which you’ve lived two out of the last five years for single filers and $500,000 for married couples. Very seldom are any profits generated outside the taxing arm of the government, but this exceptional avenue has made owning a home for long term investments more attractive. Of course it doesn’t guarantee that you’ll always make money on a home, but this allowance has saved many homeowners tens of thousands in taxes over the years.
- Lending Costs – There are several closing costs paid with the origination of a new loan that can be deducted as well. The most beneficial typically is the ability to deduct loan origination fees (points) on a tax return. Other potentially deductible costs are prorated interest and property taxes on a new loan.
It’s not commonly advisable that any buyer make their decision to purchase solely on these tax benefits available to homeowners, but it can tip the scales when doing an overall analysis of renting vs. buying. It certainly can offset some of the additional expenses that homeowners have for maintenance and upkeep. Ultimately each individual should consult with their tax professional for a detailed analysis of how a home purchase may impact their specific financial situation.
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