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It’s staggering when you think about the cost of living, especially if you’re a renter and not a home owner. If you are currently paying $1,000 a month for rented housing, then over the next three years, your property management company will effectively have reaped $36,000 of your hard earned cash. In most cases, you know your rent will go up every year, even if you live in an area that has rent control regulations. You’re paying their mortgage, when you could be building equity in your own property. There are many benefits of home ownership to consider. Let’s take a look at what tax deductions are available to you as you consider purchasing your own home.
What if I don’t have the money to buy a home right now?
There are many loan programs available that offer low and no down payment options. Some programs permit gift money as a down payment, and often sellers are willing to make a contribution to your purchase if they want to sell the home quickly.
How much is tax deductible?
Tax deductions vary, but there are solid rules the IRS lines out for us. The IRS has several publications and tax topics that are worth reading if you’re game to comb through them. Publication 530, Tax Information for First-Time Homeowners is very thorough, as is Publication 936, Home Mortgage Interest Deduction. For quick reference, you can refer to Tax Topics 505, Interest Expense and 504, Home Mortgage Points. To make it much easier for you, I can recommend several CPAs that have done a great job for my clients in the past that can help you with your taxes and financial planning. The publications I have mentioned often refer to local and state guidelines, so a CPA will undoubtedly be able to answer all the questions that arise from reading these materials. Here are the just a few tips you should know up front:
· Real Estate taxes are deductible on a primary residence. Real Estate taxes are paid at settlement or closing, or through an escrow account.
· Mortgage interest is deductible on a loan to purchase, build or improve your home. Your lender will provide you with a Mortgage Interest Statement (Form 1098) to state the total interest paid during the year. This should include any deductible points paid for that year.
· Pre-paid interest is deductible in the year it is paid. This is money paid up front, usually paid in the form of points (or a percentage of the loan amount), and this is done to secure a lower interest rate.
· If you are building a home, the interest on the construction loan is deductible, as long as the construction period does not exceed 24 months prior to the date that you move in and claim this as your primary residence.
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