Now that tax season is here, I thought it would be a good idea to post an article about some of the write-off benefits of owning a home…
For many years, the federal government has encouraged home ownership by providing significant tax benefits that are not available to renters. It’s getting close to the April 15 tax deadline, so let’s take a look at some of the tax benefits.
If you purchased a home during 2007, you will find you no longer will be able to use the 1040EZ form. You now will be able to deduct interest paid on your home mortgage and your property taxes on Schedule A of the long form 1040.
In addition, you also will have the opportunity to itemize other expenses as well on Schedule A of the 1040. You may have expenses such as medical, business or charitable, which you wanted to deduct from your income in the past but, because you were renting, the total of these expenses did not exceed the amount of the standard deduction. Now you can deduct these items in addition to your interest and property taxes.
The deduction for interest only can save you a tremendous amount of federal income tax. During the early years of your mortgage particularly, the majority of your mortgage payment is interest. Let’s take a look at an example.
Let’s say you have financed a $250,000 mortgage at 6.25 percent, payable over 30 years. Your monthly principal and interest payment is $1,539, or $18,468 per year. In the first year of the loan, you will pay approximately $15,625 toward interest and $2,843 in principal. The $15,625 interest amount is deductible.
Simply stated, say you make $100,000 per year and your tax rate is 25 percent. Prior to owning a home, you could deduct only your standard deduction. Now your interest deduction alone would be $15,625. This is more than your standard deduction. Your taxable income would be less, and you could save approximately $1,525 in income tax, depending on the amount of your standard deduction.
That’s not the only benefit of home ownership.
During the first year of home ownership, you also may be able to deduct part of the dollar amount paid to the lender for points because these are considered upfront interest. The amount should appear on your mortgage interest statement for the year.
Although the amount of interest will decrease each year as you pay down the principal, it still will be a sizeable deduction each year. Your lender will send you an annual statement showing the exact amount of interest you have paid. Interest on a second mortgage often is tax deductible as well. If you have a significant amount of equity in your home, obtaining a second mortgage is a good way to pay off high credit card debt and increase the amount of deductible interest.
Property taxes also are deductible on your federal return. Usually, the amount of your property taxes will increase each year as your property increases in value as well as being based on changes in the tax rate in your area. If your lender is paying your property taxes, this amount also will be shown on your annual mortgage statement.
If you own rental property, the rent must be claimed as income on Schedule E of the 1040. However, the expenses for interest, taxes, insurance, utilities, maintenance, repairs, as well as depreciation, can be deducted against the income, often resulting in a reduction of your taxable income.
It’s important to keep good records of the improvement costs you have added to your home and any other costs to obtain or refinance a home mortgage. These costs add to the original cost of your home to establish the basis of the home. This total amount will be subtracted from the amount you receive when you sell the home to determine a gain or loss from its sale.
Take a look at the amount you currently are paying for rent and check with a lender to see how much in mortgage payment that amount would equal.
It’s a great time to purchase a home with today’s low rates and innovative programs. Contact your lending professional today.
-Pam Robinson, Reno Gazette Journal 1/26/2008
January 30th, 2008 at 12:28 pm
Thanks for the sketching in of these interesting facts. I think that everybody from us would vote next to home ownership because even in difficult economic situations you can make profit from selling it. I`m very contented that I made up mind and chose to buy one of the picturesque Toronto houses. Fortunately I didn`t have to take a second mortgage. I`ve found quite risky that solution even you advised it firmly.