Taking advantage of tax Benefits for Home Owners
Buying a home is usually one of the largest investments you will make in your life time. However, owning your home can also save you money in the long run. Home ownership may not have an immediate financial return, but as you make your payment each month your equity will increase. Over time, owning your own home means putting money in your pocket instead of putting all that money into someone else’s pocket. It’s sometimes referred to as a forced savings plan. You have to make your house payment just like you have to pay your rent payment. That is, if you want to have a roof over your head. But unlike rent, you will eventually pay your mortgage off. Then that money can go towards renovations, college educations, dream vacations, or just living more comfortably. In essence,you are laying a foundation for your own financial success. Here are some tax benefits that you can take advantage of while paying of your mortgage.
- Home Mortgage Interest Deduction. Homeowners can deduct interest paid using Schedule A on your personal tax return. The first years of your mortgage, your payment is mostly interest which can generate quite a large tax deduction. Your bank will send you notice of the amount of mortgage interest paid the previous year on form 1098.
- Real Estate Tax. Any taxes paid on real estate is fully tax deductible. This includes primary residences as well as vacation homes.The amount of taxes paid will also appear on the 1098 form.
- Capital Gains Deduction. Your home is usually a long-term investment, but there are many reasons in life that you may want to sell, like, changing jobs, adding a new child, or downsizing. Maybe you you want to take advantage of your equity to sail around the world. If you have owned your home for at least two years you qualify for capital gains exclusion on any profit up to $500,000 (if you’re married). Which means that if you have built up a large nest egg in your home you can sell it without paying through the nose in income tax.
- Little Deductions Add Up. There are also some a few smaller deductions, that may still be worth your time. If you paid points you can deduct the cost of those points. however, there are several criteria you must meet before claiming those tax benefits. If you pay private mortgage insurance and your loan originated after 2007 or before 2013, you may qualify to deduct some or all of your private mortgage insurance. Unfortunately, for homeowners who protect their investment by maintaining and improving their property regularly, you cannot deduct the money you spent. But, when you sell your home and your equity amount puts you above capital gains limits, you can use the receipts from those improvements to lower your tax burden.
Buying a home also comes with risks. Home prices don’t always trend upward. Before making any kind of investment it’s always a good idea to weigh the risks against the benefits. Every situation is different and what is beneficial for one person may not be beneficial to another. Always do your research and when in doubt ask a professional.