By Ali Sahabi of Optimum Group, LLC
President, Building Industry Association (BIA) Baldy View Chapter
As we put the holiday season behind us, April seems like a long way away. However, if you are a homeowner or a homebuyer, you know that now is the time to start thinking about tax season – and how owning a home might be the best tax decision you ever make.
Today, homeownership offers enough financial benefits to fill inches of newspaper space every week, but as the New Year dawns, the most important financial benefits (and those that propel a vast majority of people to consider buying a home) are the tax benefits of homeownership. From tax breaks on the amount of your home used to do business to deductions for the interest on mortgage loans and real estate taxes, to capital gains exclusions for sales of a principle residence, homeownership offers a wide variety of tax benefits available only to homeowners.
According to the National Association of Home Builders (NAHB), the most important of these benefits is the Mortgage Interest Deduction or MID. Homeowners who itemize their federal income tax deductions can deduct 100 percent of their mortgage interest payments on a first or second home for up to $1 million of mortgage debt. The Mortgage Interest Statement Form 1098, which homeowners receive from their lenders, shows the total amount of home mortgage interest paid during the year. Homeowners also can deduct the interest paid on up to $100,000 of home equity loans. This means that, most homeowners can deduct all of the mortgage interest they've paid on their home each year.
Two other major benefits include the Real Estate Tax Deduction which enables homeowners to deduct the state and local real estate taxes they pay each year on an owner-occupied home; and the Capital Gains Exclusion. When it is time to sell a home, in many cases homeowners don’t have to pay capital gains tax on the profit from the sale. Under present law, married couples who have owned and occupied their principal residence for at least two of the past five years do not have to pay any taxes on the first $500,000 in profits from the sale of their home. Single filers earn up to $250,000 tax free.
Another deduction homeowners may be able to take is for mortgage insurance premiums. Generally, people who purchase a home without putting 20 percent down have to buy mortgage insurance, and those premiums may also be deducted from taxable income. In addition, homeowners who don’t use the home as their principal residence and rent it out may be able enjoy some tax benefits, including interest and depreciation deductions.
Remember, homebuyers should check with their tax professional about any specific local, county or state benefits available to them as well. These are just some of the major tax benefits of homeownership and ever major decision should be discussed with a tax professional before making any major financial commitments.
Thanks to these benefits, buying a home offers tax savings that can add up to tens of thousands of dollars over several years and homeowners can rely on the MID to help offset the costs of homeownership. More importantly, prospective buyers can take these deductions into consideration when choosing homeownership over renting.
These are just some of the key tax advantages offered to homeowners. Homeownership has many important benefits for millions of Americans across the country — including creating a sense of community, building wealth and providing financial security. To learn more about these benefits, consult with a tax professional. To learn more about the mortgage interest deduction, visit www.ProtectHomeownership.com.
The BIA Baldy View Chapter seeks to advance the opportunity to attain the American Dream of home ownership. For additional information on homebuying, home improvements or the benefits of homeownership, go to www.biabuild.com or www.nahb.com/forconsumers on the web.