FROM RENTER TO BUYER
Your lease is about to end and the thought of buying a home is at the forefront of your mind. The rent that you are paying now is cheaper than what you know your mortgage will be, but is that it? That can’t be the only factor and it’s not! Buying a Home comes with significant tax benefits that depending on your situation, could save you thousands of dollars.
One of the joys of being a Homeowner is paying taxes! Investing in your City, County or Local School District. The payment is 100% deductible from your federal income tax.
MORTGAGE INTEREST DEDUCTION
DEDUCTING MORTGAGE INTEREST
The Mortgage Interest Deduction allows Homeowners to deduct Mortgage Interest up to $1million paid on your home loan. This is huge. During the first 5 years of your loan, you are paying mostly interest, making this deduction especially helpful.
You have a $250,000, 30-year mortgage with a fixed rate of 4.5% interest rate. You will pay roughly $11,000 interest during the first year. Assuming you are in a 25% tax bracket, deducting the interest will save you about $2,750 in taxes.
Renters do not get the same benefit. The landlord takes these tax savings while the tenant carries the burden of paying for their mortgage. Learn more about how interests rates from 2019 to 2020 have played a role in the home buying process here.
LOWERING YOUR INTEREST RATE
Interest rates are extremely low right now. With that said, buyers have the option of buying “points” to lower their interest rate upfront.
Typically a “discount point” cost 1% of the loan and will yield the borrower savings. NOTE: the lender should indicate how long it will take you to “pay off” this up front cost with long term savings. Ask so you can make an informed decision with regard to buying down your interest rate.
What many buyers don’t know is that a one time tax saving is applied to your investment of buying down a “point(s)”. Assuming again that you are in a 25% tax bracket and spend $2500 on Discount Point(s), your total savings would be $625 ($2500 X 0.25% = $625).
If you are planning to live in your home for at least 7 years, give discount points a serious thought. They will save you money in the long run.
MORTGAGE INSURANCE PREMIUM DEDUCTION
MAKING BUYING A HOME AFFORDABLE
Affordability. Your mortgage payment is likely not the only debt that you will be paying. Most buyers are juggling other debt. If you have and plan to put 20% down on your loan – great. If not, know that your Premium Mortgage Insurance (PMI) is entirely deductible.
The Federal House Administration (FHA) allows buyers to make zero-down or low-down options when buying a home, but FHA also requires PMI on all loans. Mortgage Insurance is a way that lenders protect themselves against the risk of buyers defaulting on their loan. The good news is you can deduct your mortgage insurance from your federal income tax as itemized deductions up to a gross income of $109,000 and half of that if you are married but file separately.
IS HOME-OWNERSHIP RIGHT FOR YOU?
BUILT IN BENEFITS
There are additional incentives for making your home “green” (ie solar power) and savings for overall upgrades that you do to your home. Depreciating allowances for rental space and home office space are others that can save you a sizable amount of money every year.
Contrary to popular belief these aren’t “loopholes”! These tax benefits are built into our system to encourage and support the dream of home ownership in America.
Buying a home is a huge decision. For many it is the single largest investment they will make in their life. Renting has some perks. You have to decide for yourself if you are ready to invest in a home. Just know that when you are ready, there is tax code to help make home ownership more affordable.
WHEN YOU SELL A HOME
ONCE YOU’VE BEEN THERE AWHILE
Fast forward – You have been in your home for a few years (let’s say 3 – 5) and are ready for a move. Perhaps you received a job offer out of state or are looking to invest in a larger home or different area. The market has continued to appreciate since you purchased and you renovated the kitchen and bathroom. Now you are able to sell for $335,000, when you originally purchased for $250,000. Your capital gains tax is tax free up to $250,000 and $500,000 for joint filers. No other investment that I know gives you this significant tax saving!