5 Tax advantages of owning a home... #5 will make your day!
, by Rob Kaufman
Whether you currently own a home or are just thinking about purchasing one, there are a number of tax advantages you'll probably want to know about. These advantages are sometimes hidden within paperwork and difficult to find (without the help of an expensive accountant) or often overlooked by those of us who are not industry professionals. So we're putting an end to the mystery by listing 5 of the most common (and money-saving) tax breaks of homeownership.
Deductions vs. Credits
Before discussing the top tax breaks of homeownership, it's important to know the difference between tax deductions and tax credits. A tax deduction reduces adjusted gross income which in turn reduces the amount of tax owed. A tax credit is an actual amount of money one can subtract from their tax bill and it depends upon specific situations, locations, classifications and industries of the individual or business.
This article deals with tax advantages based on deductions. For instance, if you're in the 25% tax bracket, the tax amount owed on an item for which you can claim a deduction would be reduced by 25%. An example would be: if you claim a $1,000 deduction on a specific item, you can expect the tax owed to drop by $250.
Let's talk Top 5
Here are the top 5 tax advantages to owning a home:
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Mortgage Interest. For most homeowners, especially when first taking out a mortgage, the majority of your house payment goes toward interest. Unless your mortgage is more than $1 million dollars, all of that interest is deductible. If you refinanced your loan or have a home equity line of credit balance, that interest is tax deductible as well.
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Property Taxes. Another large portion of your monthly home payment goes toward property taxes. These are either held in an escrow account towards an annual or bi-annual payment or paid directly to the municipality and can be deducted for as long as you own your home.
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Points. If you paid points to obtain a better rate on your home loan, you can claim a deduction on those points. However, three requirements must be met: the loan on which you paid those points must be used to purchase or build your primary residence; point payment is an established business practice in your geographic location; and the points paid were within the average/median range. The same deduction can be used for points paid for loan refinancing, home equity loans or lines of credit.
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Private Mortgage Insurance. The deduction for homeowners who pay private mortgage insurance (PMI) has been extended for 2016 tax returns. This deduction depends upon your adjusted gross income and how you file returns (i.e. married and file separately), so check the regulations online to see if this deduction can apply to you.
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Home Improvements. This is something many people don't know about (or are told doesn't exist) perhaps because it comes into effect when one is selling their home. Here's how it works:
If you've lived in the home for two of the last five years leading up to the sale and the improvements add to the value of your home, prolong its useful life or adapt your home to new uses (IRS lingo), you may be able to deduct these costs.
These improvements might include items like: plumbing system or boiler upgrades, installation of a water filtration system, room additions, upgrading your kitchen, replacement of flooring, installing an in-ground swimming pool, fence, or replacing a roof, installing new windows and a lot more.
Under current law, the first $250,000 of profit on the sale of your principal residence is tax-free ($500,000 for married couples filing joint returns). Once you sell your home, add up all the costs for your home (original purchase price, fees, cost of all qualifying improvements, etc.) so you can get the "adjusted basis". You can then subtract the adjusted basis from your home's sale price and this is the amount on which you should be taxed. As you can see, keeping good records of all your home improvements so you can subtract them from your sale price can help reduce your tax bill when you decide to sell.
See what your tax savings can be on a home equity loan using our calculator at myFICO.com. There's even more information at the myFICO forum where people are discussing tax savings, loan challenges and lots more.
Rob is a writer... of blogs, books and business. His financial investment experience combined with a long background in marketing credit protection services provides a source of information that helps fill the gaps on one's journey toward financial well-being. His goal is simple: The more people he can help, the better.
