5 Tax Breaks You Could Get for Buying a Home | #GetInformation #TalkToYourAgent #SiliconValleyAgent #YajneshRai

Facebooktwitterpinterestlinkedin

5 Tax Breaks You Could Get for Buying a Home — The Motley Fool

For many people, buying a home is the single best thing you can do to save money on your taxes. While most are only available if you itemize, there are five major tax breaks homeowners may be able to use. Here are the details on each so you can estimate your annual tax savings if you take the plunge into homeownership.

1. Mortgage interest (the big one)

If you itemize deductions on your tax return, you can deduct the interest you pay on your mortgage. The deduction is valid for mortgages on a first and/or second home, and can be used for interest paid on up to $1,000,000 of outstanding loans. The deduction is not allowed on investment properties, as these have their own special tax treatment.

Just to give you an idea of how big this deduction can be, let’s say that you take out a $300,000 mortgage at 4% interest to buy a home. For simplicity, we’ll say you make your first mortgage payment on Jan. 1, and on the first day of every month thereafter. This translates to a mortgage payment of $1,432 per month, or $17,184 for the year.

Of this amount, $11,904 will be interest. That’s a pretty big amount of money. If you’re in the 25% tax bracket, this could save you up to $2,976 over your first year of homeownership.

2. Property taxes

In addition to your mortgage interest, you can also deduct the property taxes you pay to state and local governments. This deduction can be big or small, depending on where you live. For example, if you live in New Jersey, where the average property tax is 2.38% of the home’s value, this can be worth thousands of dollars per year on even a modest home.

On the other hand, if you live in a low-tax location, like my home state of South Carolina with a 0.57% average property tax rate, it could be worth just a few hundred. Of course, this is more than offset by the fact that you paid less property tax in the first place.

 

3. Mortgage insurance

If you put less than 20% down when you buy your home, you’ll most likely be required to pay mortgage insurance, at least until you get the balance paid down to 80% of your home’s value.

While nobody likes paying mortgage insurance, fortunately this is another expense that’s tax-deductible, if you qualify. Unlike the first two deductions, the ability to deduct mortgage insurance phases out for adjusted gross income (AGI) above $100,000 and disappears completely for AGI above $109,000.

4. Gains on the sale of your home

If you eventually sell your home for a profit, or sold your last one at a profit, the gains could be tax-exempt. As long as you meet three conditions, you can exclude up to $250,000 of gains if you’re single and $500,000 if you’re married.

1.     You owned the home for a total of at least two years of the five-year period before the sale.

2.     The home was your primary residence for two or more years within that five-year period.

3.     You haven’t excluded another gain that resulted from selling a home within two years.

5. Did you move for a job?

If you move for job-related purposes, you can deduct your expenses related to moving into your new home. And, you don’t even need to have a job lined up before you move. As long as you pass two IRS tests, you qualify for the deduction.

·        The “time test” says that you need to work full time for 39 out of the 52 weeks immediately following the move.

·        The “distance test” says that your new workplace must be “at least 50 miles farther from your old home than your old job was from your old home.”

If you qualify, you can deduct the expenses of driving yourself and your belongings to your new home, the costs of storing, packing, and shipping your belongings, lodging expenses on the way, and the cost of a mover or rental truck.

Best of all, this is an above-the-line deduction, meaning that you can take it even if you don’t itemize. Moving can be pretty costly, so if you qualify, we’re talking about some serious tax savings here.

The million-dollar question: Do you itemize on your tax return?

The gain on the sale of a house can be taken advantage of by anyone, regardless of whether or not you itemize. It’s an exemption, not a deduction, so it doesn’t matter how many other deductions you take. And, moving expenses qualify for an above-the-line deduction, so you should certainly take advantage if you qualify. On the other hand, the three other deductions are available only if you itemize on your tax return. If you choose to take the standard deduction, you won’t be able to use them.

If you buy an expensive home or live in a high-cost area, the interest and tax expense can result in a huge tax break. However, if you buy an inexpensive home, don’t have mortgage insurance, and don’t have any other major deductible items, buying a home might not save you anything at all. So, if you don’t already itemize, it may be a good idea to calculate the impact of buying a home on your taxes.

 

Facebooktwitterpinterestlinkedin

Leave a Reply

Your email address will not be published. Required fields are marked *