When considering the purchase or sale of a home, factor in the tax benefits. These benefits could make homeownership quite profitable. A home is one of the largest investments most people make during their lifetime. Therefore, it’s imperative to consider factors other than purchase price and maintenance.
Besides death, taxes are one of life’s certainties. Homeownership provides a relief in the tax realm. The government encourages the purchase of homes through tax relief and a great deal of money can be saved by the purchase.
It’s recommended that you consult with an accountant or financial advisor to fully understand the opportunities available for your specific situation. Each real estate transaction can have certain restrictions and conditions for these benefits. But here are some general tax benefits for home ownership.
Purchasing a Home
In most instances, origination fees and loan discount points are deductible.
The IRS allows deductions on interest in the year it is paid. If the day you purchase your home isn’t on the first, you will have to pay a daily interest charge between the closing day and the end of the month. Don’t forget this when figuring the amount of interest to deduct.
Loan origination fees Closing costs are inevitable and can be attributed to the cost of a new home. Some of these costs can be deducted completely and others partially on your income tax forms. Typical closing costs include process fees on a sale, title fees, mortgage points, property appraisal, attorney fees and recording fees.
Loan discount points Consumers are often charged fees from the lender. These are considered points. One percent of the mortgage equals one point. In most cases these points can be deducted as long as your tax return is itemized and the points are deducted in the same year that you bought the home. Refinances are handled differently and have different standards. If a portion of the mortgage is used in improvements, then a certain number of points can be deducted.
Interest on mortgage
This is considered to be the most advantageous reason to buy a home. The interest paid on the primary residence can be deducted if itemized on their tax return.
Interest on your mortgage is deductible if you itemize on your tax return. You can deduct interest up to one million dollars. This applies to both first and second home mortgages.
You can also deduct up to $100,000 on home equity loan interest as well.
Real Estate taxes are deductible.
Home Improvement and Repairs Home improvements viewed as maintenance are not tax deductible in general. However if repairs made to a home become a remodel, the work could be a tax deduction.
Selling your home
If you have owned and occupied your home for at least two of the last five years, you can sell your home and pay no federal income tax. If you are single, you are allowed a $250,000 deduction and married couples enjoy $500,000 tax free.
In theory, you can buy and sell a home every two years for a lifetime. There are different rules for selling before the two year limit, so a minimum of two years is highly recommended.
When considering the purchase of a home, be sure to add up these tax benefits for maximum benefit.