Tax Benefits of Owning a House

The tax benefits of owning a house can be quite substantial, especially in the early years of the mortgage. On your tax return each year you can deduct the real estate taxes paid on the home as well as the interest paid on the mortgage loan. If your loan is less than one million dollars, the the full amount of interest can be deducted. Since most mortgage loans fall into this category, buying a home can be a wise choice because you are basically paying yourself to live in your home, and what you aren’t paying yourself you are deducting from income taxes. Excellent.

Your tax benefits will vary based on the amount of taxes and interest you pay. Naturally if you have a larger mortgage, you will be paying a larger sum of interest, which is then a larger sum that you can deduct from your taxable income. The same rule applies to real estate taxes. The amount of interest you pay in a year is also affected by how far along you are in the process of repaying your mortgage loan. The bulk of interest is actually paid in the beginning years of the loan, so your deduction will be highest the first couple years after buying your house.

Be careful to note the point at which the tax benefits of owning your home do not outweigh the standard deduction. Later in years, as you pay less and less interest and more on the principle balance the scale can tip back to what it was before your bought your home, unless you are able to deduct other items like charitable donations, etc.

One way that you can increase the value of your home, your quality of life, and continue to get excellent tax deductions is to take out a loan against your home to make substantial improvements. If the loan is secured by your home, all of the interest on that loan will be deductible. It falls under the heading of home acquisition debt, which is the same heading as your original mortgage loan.

Home acquisition debt caused by taking out a loan for improvements is different than home equity debt. A home equity loan can be used for anything you want, and some or all of the interest on that loan is deductible as well. The limits to the amount of deductible interest paid on home equity debt is either interest paid on a loan amount up to $100,000 or the part of the loan that does not exceed the difference between the fair market value of your home and the principle balance due on your home.

For example, if the fair market value of your home is $450,000 and the amount you still owe on the home is $100,000, you can take out a home equity loan for $300,000 – but only $100,000 of that loan’s interest will be tax deductible. On the other side, if you still owed $400,000 on the house and were approved for a home equity loan for $70,000, only $50,000 of that loan’s interest would be deductible.

Always keep up to date on current tax laws because deductions for different items can be available for short periods of time or can change over time. For example, some people are eligible for their private mortgage insurance payments to be deducted, and the government has offered tax credits to people who purchase homes during a certain period of time. These sort of credits and deductions won’t be around forever, but make sure you are informed of their implications Who knows? Perhaps the government will start offering credits and deductions based on energy usage and other “green” ventures. The point is: do the research in order to get the most deductions possible. Taxes are one of the government’s favorite things to play and they change every single year; don’t miss out!

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