Tax Benefits of Owning a House vs Renting
Whether to buy or to rent a house is perhaps one of most confusing housing decision one has to face. Although it is a very personal choice to make, significant tax savings when you own a house probably tilts the balance in the favour of homeownership. When you buy a home, you are eligible to deduct mortgage interest, property, mortgage insurance and a variety of other taxes from your federal income taxes. Let’s explore in details how home ownership can let you reap significant tax benefits:
1. Mortgage Interest Deduction
The interest that you pay on your mortgage is tax deductible up to $1 million if you’re married and filing jointly or $500,000 if you’re married but filing separately. Another mortgage to either buy another home or to improve your home, will also counts towards this $1 million limit. You can qualify for the mortgage interest deduction, if your mortgage is secured by your home.
2. PMI and FHA Mortgage Insurance Premiums
What is PMI? It is Private Mortgage Insurance. If you haven’t been able to pay a recommended down payment on your mortgage, your lender will require the mortgage to be insured. You can deduct the cost of PMI on Schedule A if you itemize your return and if your income is less than $100,000 for a married couple filing jointly or $50,000 for a married couple filing separately. This applies to the loans taken out in 2007 or later. You are not eligible for the deduction if your income exceeds $109,000 per year or $54,500 per year if you are married but filing separately. This deduction provision was developed as part of the Tax Relief and Health Care Act of 2006 and will span through 2015. It might expire at the end of 2015 if Congress decides to renew this deduction.
3. Property Tax Deduction
The property taxes that you pay on your principal residence and vacation home are 100 % deductible. If your mortgage is with an escrow account, you can’t deduct the escrowed money that is meant to pay property taxes until you use the money to pay your real estate taxes. In this case the deduction is reduced by a similar amount by the city or state property tax refund.
4. Tax Deductions on Equity Loan Interest
In addition to the mortgage interest deduction, you may also qualify to deduct some interest that you pay on a home equity loan or line of credit. How does it help you? This enables you to swing your credit card loans towards your home equity loan and you pay a lower interest rate. However, there is limit placed by IRS on the amount of debt you can qualify as home equity. The total amount is limited to the smaller of:
• $100,000 for a married couple who are filing jointly or $50,000 each for the married couple filing separately, or
• The total of your home’s value in the open market, excluding other outstanding debts against the property.
5. Credit for energy efficient home improvements
If you have launched initiatives to make your home more energy efficient, you might qualify to gain the residential energy tax credit. All efforts towards going green such as upgrading your water heater, home insulation, adding windows, doors and skylights and also upgrading your heating, ventilation and central air conditioning towards systems that are more energy efficient, you can claim an energy credit with a lifetime cap of maximum of $500. And not to mention the significant cost savings on your utility bills if you are switching to these energy efficient upgrades.
6. Points or Prepaid Interest Deduction
Your mortgage lender charges you a prepaid interest or points (along with other fees) that easily add up to thousands of dollars. The points are 100% deductible in the same year you paid it with other interest on your mortgage. In case you have refinanced the mortgage and have used the loan money for home improvements, the refinanced mortgage points are also deductible. But these points are only deductible over the entire span of the loan, not all at once.
7. Capital Gains Exclusion
What is a capital gain? It is a profit you gain when you sell your home for more than what you bought it for. For example, if you bought it for $400,000 and then sell it for $600,000, your capital gain is clearly $200,000. While most profits on your investments are taxed, a percentage of the profit gained from selling your home is not. So, if you are single, you can keep up to $250,000 in profit or $500,000 if you are married. You are eligible for capital gains exclusion every two years if you have used the property as your main residence for at least two years in the last five years. What if you have owned the house for only one year? You are still eligible for up to 50 percent exemption. On the other hand, you will qualify for a total allowed exemption, if you are required to move from your house because of any unexpected situation beyond your control.
Did you see how buying a home can help you achieve considerable tax benefits? If you want to explore how you can leverage the maximum benefits from the available tax breaks, it is advisable to get in touch with a reputed and reliable tax professional before and after you buy or sell a home. You must, however, remember that you must file an annual income tax return with the U.S. government if you want to achieve these tax advantages.