Income Tax Benefits to Homeownership

Owning a home is a smart way to reduce one’s tax burden due to Uncle Sam.  In fact, it’s one of the few remaining strategies for doing so for many taxpayers.  Especially for first time home-buyers who have not yet experienced the value of this benefit, it’s helpful to know what the savings can be.  In fact, this benefit might even allow you to afford more home than you thought.

Each year, a taxpayer can deduct from their taxes the interest paid on their mortgage and real estate taxes that were paid during the year.  In addition, when filing in the year that the new home was acquired, a taxpayer can also deduct any “points” that were paid as part of the closing costs.

I should state right here that I am not a tax advisor, and clients should always check with their respective tax advisors or accountants about these issues.  There are some restrictions to be aware of; for instance, the rules change where the original acquisition debt exceeds $1 million.  There are also other considerations regarding interest on investment properties and second homes, so people with those kinds of properties in their portfolio should certainly seek more financial guidance regarding tax matters.

Let’s look at an example where a person buys a condo and gets a loan for 300,000 at a 6% interest rate.  The condo also has property taxes of $335/month, or $4020 per year.  Let’s also assume that this person is on a 28% tax bracket, as determined by his/her income and marital status.

The interest paid in the first year on a $300,000 loan would be roughly $18000.  Add to that the $4020 in real estate taxes and that taxpayer can deduct $22020 from their adjusted gross income.  That amount multiplied by 28% equals $6165.60, or $513.80 per month.

Put another way, let’s say a potential first time home-buyer feels that they can comfortably afford $1600/month as a monthly payment, probably because that’s what they’re currently paying to rent.  However, recognizing the positive tax benefits in the above example, that buyer can probably just as easily afford to buy a place to live, even with payments of $2150 per month.  The difference is in the tax savings, and first time home-buyers are often not aware - or don’t believe - that the savings are legitimate.  To be on the same footing as they were when they were renting an apartment, they would need to change their W-4 Withholding form with their employer to enhance their monthly take-home pay, or expect an additional $6165 in their tax refund the following year.

For some borrowers, there are even more deductions:  Mortgage insurance premiums, if applicable, can be deducted, with some restrictions.  And, for the year in which the property was acquired, you can also deduct any “points” that were paid at settlement, even if the seller essentially paid for them by offering a concession.

Don’t sell these benefits short - they’re there for taxpayers to take advantage of, and these deductions are some of the few that remain for many people.

Again, please check with your accountant and/or tax advisor about your particular situation.

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