Before considering the purchase…
Before considering the purchase a home, consult a Certified Public Accountant and Financial Advisor to investigate whether owning a home is right for you.
For most, the biggest piece of the home-buying puzzle is how to pay for it. Although there's no denying the expense, Uncle Sam takes the edge off by providing incredible tax breaks that many don't know about. These tax breaks fall into three categories, including:
- buying your home
- mortgage interest
- selling your home
Stick with me while I walk you through each of these and explain how you can slash your tax payments more than you thought possible.
Buying Your Home
When you buy a home, you usually can deduct loan discount points and origination fees even if the seller paid them as part of your closing costs. Lines 801 and 802 of your settlement statement will tell you if you can take this deduction. It can be substantial, because loan origination fees can total 1 percent or more.
Another huge benefit of owning a home is that you generally can deduct interest charged on the loan you took out to buy or improve your principal residence in the year that you paid the interest. Depending on how large your loan is, this can be a significant deduction. (Most people's monthly payment goes primarily toward interest, especially in the early years of the loan.)
You also can deduct interest on a home equity loan up to $100,000, which you can use to buy anything you want, including paying off higher-interest, non-deductible loans like car loans or credit card debt. But remember that your home is the collateral for a home equity loan. That means you risk losing it if you fall behind on payments, so don't borrow more than you know you can repay.
Selling Your Home
The previous tax benefits are great, but I saved the best for last: under certain conditions, you can sell your home tax-free for the rest of your life. That's right! If you're married and have owned and occupied your principal residence for at least two of the past five years, you can earn up to $500,000 on the sale of that home without paying a dime of federal income tax on the proceeds. (If you're single, the amount you can earn tax-free is $250,000.) What's more, most states recognize this exclusion, so you'll probably pay no state income tax either.
As you can see, the federal government REALLY wants to encourage home ownership through these amazing tax breaks. So if you're thinking about buying a home but the cost is getting you down, take heart: that last puzzle piece isn't as daunting as you think.
If this information was helpful, you're in luck. Every week I'll be providing valuable new tips, tricks, and insights on buying, owning, or selling a home. So check back regularly — you'll be glad you did.
Rino Maddalena is an Associate Broker with Llewellyn Realtors. To contact Rino for all of your Real Estate needs call (301) 717-1075 or via e-mail at firstname.lastname@example.org.