Disclaimer: Right up front, let me state that I am not a tax attorney, CPA or professional tax adviser. I am a real estate broker and I have an understanding of the benefits of home ownership, including tax benefits. However, anything I say about taxes and home ownership should only be used as motivation to seek the advice of a competent tax professional. Taxes are fairly personal and can vary depending on individual circumstance and the real estate involved, so consultation with a tax pro prior to taking advantage of any deduction is advised.
People buy homes for lots of reasons: to put down roots, to lock in a monthly payment rather than float with ever-increasing rent, for appreciation, for security. Though rarely considered in the purchase process, the tax advantages of home ownership become apparent after the purchase and often become a strong factor in the decision to always own, rather than rent.
Consider Ted and Andrea. They bought a 4 bedroom home in Summerfield last year for $315,500 after selling their Greensboro home. They were able to put $40,000 down (about 12.6%) and took out a 30 year fixed rate mortgage for the balance at 4% interest with 1 discount point ($2,755). Here's how their monthly payment breaks down.
$1,315.28 - Principal and Interest on the mortgage
$ 101.02 - Mortgage Insurance (they put down less than 20%)
$ 230.00 - Property Tax
$ 91.66 - Homeowner's Insurance
$1,737.96 - Total Payment
Now to the deductions:
- Mortgage interest on your primary residence is tax deductible. Ted and Andrea will pay a total of $15,783.36 in principal and interest their first year in the house, of which $10,931.69 will be tax deductible interest.
- Discount point paid in connection with obtaining a home mortgage are deductible, so there's an additional $2,755.
- Private Mortgage Insurance is usually deductible, which means another $1,212.24.
- Property Taxes are deductible, an additional $2,760.
That's a total of $17,658.93 in deductions! Assuming Ted and Andrea are in a 25% tax bracket, that means they'll pay $4,414.73 LESS in Federal Income taxes this year!
These are the obvious tax deductions most home owners might take, but there are more that apply to some other situations including:
- Capital Gains. Within some limits, the tax on the gain you make when selling your personal residence is not due if you buy another personal residence within 18 months.
- Medical Improvements. If you have to alter your home to accommodate special medical needs, i.e. installing ramps or lifts, the cost may be deductible.
- Home Office. If you work from home and have a dedicated space where you work - which may be a room or a part of a room - the cost of that space may be deductible.
- Occasional Renting. In some cases, if you rent your house out for special occasions like a sporting event or a local festival, the income from that rental may be tax free as long as it was for 14 days or fewer during the year.
Your personal residence, your home can be much more than a place to live and raise a family. It can be a very important strategy for your financial life. With tax day approaching, don't forget to discuss the possibilities with your tax professional. And if you decide that this is the year you begin to own rather than rent, there is nobody better able to help you than the Vincent Group at GreatNest.
As always, at The Vincent Group at GreatNest we are proud to save our clients money by charging a low set fee instead of a percentage commission. We are a full-service real estate company serving buyers and sellers in Greensboro, High Point, Winston-Salem, Summerfield, Oak Ridge, Jamestown, and other Piedmont Triad areas. Please get in touch with our experienced real estate professionals by calling (336) 790-5210 or by emailing Steve Vincent. Visit our website at greatnest.com.