Owning a home might seem more expensive than renting, but it offers many tax benefits that you won’t see as a renter. If you take the plunge and buy a home, you’ll likely benefit from a lower tax bill every year. Not every homeowner can take advantage of every tax break offered, but there are many that most homeowners can use.
Write Off the Mortgage Interest
Mortgage interest is probably one of the largest expenses you’ll pay when you own a home. If you borrow money to buy the home, there’s no way getting around it – you’ll pay interest. How much interest you pay depends on the loan you take. FHA, VA, and conventional loans often have low rates. Subprime loans usually have higher rates, but they make loans available to more borrowers.
Regardless of the rate you pay, you’ll be able to write off the interest on your taxes. The only exception to the rule is if you own a property worth more than $1 million. If you do, you can’t write off your interest.
Deducting the mortgage interest you pay can be a great way to save money. If you look at your amortization table on your mortgage closing papers, you’ll see how interest heavy your initial mortgage payments are for several years. A majority of the payment goes towards interest, why not write it off?
Deduct Real Estate Taxes
Another large expense of owning a home is the real estate taxes. Depending on where you live, you could pay 2-5% of your property’s value in taxes. Let’s say you pay $10,000 a year in taxes. You could deduct them on your income taxes. While you won’t get a dollar for dollar deduction, you will get a percentage of what you paid back in taxes. This can reduce your overall tax liability.
Energy Efficient Changes
If you put any money into energy efficient changes in your home, the IRS rewards you. Again, you won’t see a dollar-for-dollar credit, but you’ll get a percentage of what you paid as a deduction on your tax returns. As an added benefit, making energy efficient changes to your home can lower your utility bills. This increases the savings you get, giving you even more bang for your buck.
The good news is even after you are a homeowner, you can deduct the points you paid for the mortgage. This applies to your purchase mortgage as well as any refinances you do along the way. You can deduct points on first and second mortgages. The only difference with this deduction, however, is you must prorate it over the life of the loan. You can’t take the entire deduction in one year. For example, if you have a 30-year mortgage, you can deduct 1/360th of the amount you pay every month.
Deduct Home Office Expenses
Do you run an office from your home? You can deduct the expenses you incur. In fact, you can write off the cost of operating that space, including the utilities, mortgage interest, and homeowner’s insurance. However, you must be very specific about the area you use for this purpose. You can’t write off areas you use as an office and living area. The area must be dedicated to your business.
Owning a home may seem expensive, but you’ll get plenty of tax breaks as a result. One of the downsides, however, is you must itemize your tax deductions. If you take the standard deduction, you can’t specify that you want to write off mortgage interest or real estate taxes, for example. Everything must be itemized. You can determine what makes more sense for you. If the standard deduction is more than the deductions you’ll get for itemizing, then you don’t have to write off your homeowner expenses. In most cases, however, it pays to itemize your deductions.