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Owning a Home Can Save You Money At Tax Time

Saving Money During Tax Time blog photo

Owning a Home Can Save You Money At Tax Time

10 Ways to Save

From almost the very beginning, homeownership has been the financial foundation for the American dream. If you’re like most of us, purchasing a home is the largest investment you’ll make in your lifetime. Unlike renting, where you pay your landlord’s mortgage, owning a home may provide you with a “nest egg.” The equity that your home accrues over time is the financial cornerstone for financing your retirement, and ensuring an inheritance for your children after you’re gone. But equity isn’t the only benefit of homeownership. This guide includes 10 tax benefits you need to know about.

1. Mortgage Interest Deduction

Each year the federal government allows you to deduct the interest on your monthly mortgage payment. This deduction is available for the lifetime of the loan. Say you’ve purchased a home for $250,000. with an annual interest rate of 5%. In the first 12 months you’ll pay a total $12.500 in interest. When tax time comes around you can deduct the full amount of that interest from your earned income. While there are limits on how much you can deduct, most people rarely come close to reaching them.

2. Discount Points

While not an ongoing deduction, if you’ve purchased points to lower the interest rate on your mortgage, you may deduct the cost of those points on your federal income tax in the year you bought your home. Many homebuyers purchase discount points up front to save on their monthly mortgage payment and increase their cashflow. A discount point is 1% of the total amount of your mortgage. Using our example of $250.000 from above one point would be $2,500. For each discount point you purchase, you lower the interest rate on the life of your loan by .25 basis points – dropping your 5% interest rate to 4.75%.

3. Property Tax Deduction

Owning a home means you are subject to property taxes which are paid to the county, city and state where you live. While the amount of interest on your mortgage tends to decrease yearly, property taxes tend to increase. This means the ability to deduct these taxes could save you more money each year. Also, should sell your home, be sure to deduct the prorated amount of property taxes paid in that tax year.

4. Home Office

If you work from home, your home office can provide additional tax deductions each year. Homeowners who have a home office are allowed to deduct the amount of monthly mortgage paid based on the square footage of the office as well as a portion of the utility bills, including heat, electric and internet service.

5. Health Related Home Modifications

If modifications to your home are required for health reasons such as improving access by adding a wheelchair ramp or widening doors, the costs of these improvements are deductible. Adding special equipment that is medically required such as an air purifying system for a family member with asthma, or an elevator or bathroom on a lower floor for a patient with a heart condition, these expenses may be deductible all, or in part, from that year’s taxes.

6. Home Improvements

While regular home improvements are not deductible, provided you’ve saved your receipts, you can add the total cost of improvements made over time to the original purchase price of your home to decrease the amount of capital gains tax you would have to pay when you sell.

7. Moving Expenses

In the event that you are required to relocate for work there are deductions available for the expenses associated with moving your family, possessions and even vehicles.

8. Capital Gains When You Sell

Speaking of selling. When it comes time to sell your home the difference between the original purchase price and the sale price is considered capital gains and is considered taxable income. However, as a single homeowner you are allowed up to $250,000, married homeowners up to $500.00, before you are required to pay capital gains tax. While not a deduction, this an an excellent profit to realize before paying taxes

9. Mortgage Interest Credit

If you are a low income homeowner you may be eligible for a mortgage interest credit. Designed to make paying for your home easier, this particular deduction requires a mortgage credit certificate that can be obtained from your local or state government.

10. Prepayment Penalties

Finally, in the event your mortgage has a prepayment penalty, and either for when you sell or are able to pay off the balance early, you are allowed do deduct the amount of the penalty as part of your mortgage interest deduction.

These homeowner deductions* are in place to encourage investment and can go along way in helping you grow that all important nest egg.

*Be sure to consult your CPA or Financial Advisor to be sure you are eligible for these individual deductions.*AFN is not a tax or financial advisor, and individual tax circumstances may vary. Please consult a licensed tax professional and appropriate government agencies to determine tax consequences of home ownership.

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